Shares in the UK’s largest department store operator led the retail sector higher on Wednesday morning and helped to push the FTSE 100 index off to a comfortably higher start to the first session of the third quarter.
Marks & Spencer Group this morning reported sales figures for the fiscal first quarter that beat consensus expectations and restored some faith in the group’s future, despite chief executive and chairman Sir Stuart Rose’s cautious outlook comments.
Within the first hour of trading, M&S shares had taken on 13.5p or 4.4% to 319.5p. The positive read-across helped peers Next and mid-cap Debenhams gain a respective 4.9% and 2.5%, and also gave DIY store operator Kingfisher a fillip, up 3.0%. These performances fuelled the FTSE 100 index’s 1.5% rise to 4,311.3 and the FTSE 250’s 0.6% increase to 7,456.6.
M&S reported UK sales from stores open at least a year fell a less-than-expected 1.4% in the 13 weeks to June 27 compared to the previous year, and rose 4.2% compared to the previous quarter. The market had been looking for an annual performance decline of 2.7% in the UK. Group sales increased by 2.9% in the first quarter, with the slide in UK sales helping to offset a 16% increase in international sales.
Following the update, Numis Securities raised its earnings forecasts for the group by around 5% and upgraded its recommendation on the stock to Hold from Reduce.
Numis analyst Andrew Wade said the better-than-expected quarter was undoubtedly helped by the warmer weather, particularly in clothing, although M&S also gained market share in both its clothing and home divisions.
Noting Sir Stuart Rose’s comments that consumer confidence is stabilising but the business remains cautious on the outlook, Wade said: “Facing pressure on margins from the reversal of the VAT cut and a consumer staring down the barrel of government spending cuts and tax increases, we are not surprised by this comment.”
Numis today upped its March 2010 like-for-like sales forecast and raised its pretax profit estimate to £550 million from £524 million previously predicted, putting the broker near the top of the consensus range, “a position we are comfortable with,” given the upside potential as the group laps its “incredibly weak” comparables through the final three months of the year.
Arden Partners’ Louise Richardson was similarly upbeat on the group’s performance, citing the encouraging numbers as reason to put earnings forecasts under review. Richardson’s initial thought is that she will upgrade her fiscal 2010 pretax profit estimate to around £515-£520 million.
“It is pleasing to see a 30bp improvement in market share for clothing and footwear,” Richardson said, noting however that there was “no mention on food market share and we suspect they are still lagging here particularly in value terms due to their strategy to reduce prices.”
Arden Partners rate M&S stock as Neutral.
At KBC Peel Hunt, analyst John Stevenson sees scope for consensus forecasts to rise by around 5% if the group’s current run rate continues into the second quarter, but with the shares trading on a 2010 price/earnings ratio of 13.5 times he believes the balance sheet remains under significant pressure from M&S’s debt pile of around £3 billion.
“Looking into 2010…we prefer those retailers offering clear earnings progression, market share opportunity or upgrade potential,” Stevenson said, naming Debenhams as its preference in apparel, which he sees as offering all three.
KBC Peel Hunt today maintained its Sell recommendation M&S, while holding a Buy of Debenhams.
