M&S warns consumer squeeze will hurt profit growth

Retailer Marks and Spencer has warned that financial pressure on British consumers will affect its profit growth this year.

One of Britain’s best-known retailers said that although trading had been encouraging since early April, it expected financial pressures on customers to intensify over the rest of the year .

“We expect the decline in real earnings to deepen in the second half and persist for at least the rest of the fiscal year,” the retailer said in its full-year earnings release on Wednesday.

Chief executive Steve Rowe predicted consumers would feel the full impact of lower incomes in the fall, but said there was evidence that M&S ​​customers were better off due to higher levels of savings. students.

Online grocery company Ocado Retail, half owned by M&S, is already affected by a return of food shopping habits to pre-pandemic norms as shoppers return to stores and spend less large orders.

In a separate statement, the company said sales growth would be in the “mid-single digits” this year, down from the 10% it had previously indicated, as rising energy costs wreaks havoc.

M&S expected Ocado Retail to make a “minimal” profit contribution this year. Still, Rowe said the group “remains very confident in Ocado’s future potential” and pointed out that online grocery sales were still significantly higher than before the Covid-19 pandemic.

M&S recorded a profit of £13.9million on Ocado Retail last year, itself a sharp drop from £78.4million the previous year, when the online grocer enjoyed a big shift to online grocery shopping during the pandemic.

Ocado’s weaker-than-expected earnings will be compounded by the lack of business rate relief in the UK and the withdrawal of M&S from Russia, which Rowe said was permanent.

“We won’t go back there as long as the current regime is in place,” he said. The band’s decision to pull out will result in around £30m of one-time costs.

M&S’s share price was volatile in early trading in London, while Ocado’s stock was down around 4%.

Rowe, who steps down later this month after six years, had made progress in reviving M&S’s fortunes.

A better performance from its revamped food business and improved apparel and homewear sales helped the retailer raise its forecast twice in its last fiscal year.

In the 12 months to April 2, M&S reported pre-tax profit excluding certain items of £523m, matching analysts’ forecasts and up from £50m the previous year. . Revenue was £10.8bn, up 7% from a year ago.

But the chief executive was optimistic about the deteriorating outlook, stressing that the business was fundamentally in better shape. “Yes, there are problems with short-term trading – but when haven’t there been?” he said.

Rowe is set to hand over the general manager position to Stuart Machin, currently head of food. Katie Bickerstaffe, head of apparel and home, will be co-CEO but will report to Machin.

Analysts at Peel Hunt said the slowdown in sales at Ocado Retail was “disappointing”, underscoring how badly the company was affected by the cost of living crisis facing consumers.