Fall in M&S sales sends shockwaves through retail sector

4.45pm update

• Fiona Walsh and Julia Finch
• guardian.co.uk,
• Wednesday January 9 2008

Marks & Spencer sent shockwaves though the retail sector today as it revealed its first fall in sales for two-and-a-half years and warned that trading could remain difficult into 2009.

Sir Stuart Rose, chief executive, said high street conditions were the worst he had seen for a decade as shoppers tightened their belts in the face of rising household costs.

M&S shares slumped 20% at one stage — wiping £1.7bn from its stock market value — as it said a poor performance over the crucial Christmas period pushed underlying sales down by 2.2% in the third quarter, well short of City forecasts.

Analysts had been hoping for continued sales growth at the group but today's figures show the core clothing and general merchandise division down by 3.2% and food off by 1.5%.

The retailer said it had sold more general merchandise than ever before — volumes were up 5% — but it had attracted shoppers by slashing prices by 6% from 2006 levels.

The poor performance of the food halls contrasts sharply with that of its rival upmarket grocer Waitrose, which earlier this week reported a 4% increase in festive trade.

Rose insisted the trading update was not a profit warning and refused to comment on the biggest one-day fall in M&S shares for 19 years. However, he said the 520-strong chain's Christmas trade showed "we are in for a tough time in terms of the UK plc economy". He predicted the slowdown would stretch into the spring of next year.

The newly knighted M&S boss is now "battening down the hatches" in the face of the consumer spending slowdown.

Retailers, he said, faced the big problem of rising costs but not being able to pass those cost increases on to consumers through higher prices.

Rose said there was a widening gulf between rich and poor in the UK: "I have never seen such a polarised UK economy. The rich are so very, very rich. The West End can't get enough diamonds. But the poor are getting poorer. Outside London it is a completely different economy." M&S sales, he said, reflected that pattern, with south-east stores doing relatively well, while Scotland and the north were the worst performers.

His gloomy view of the year ahead echoes the warning last week from the fashion retailer Next, which said it was "extremely cautious" on 2008.

Marks & Spencer joins a lengthening list of retailers to be hit by the consumer spending squeeze. The electrical retailer DSG, which takes in Dixons, Currys and PC World, warned last week that profits would fall £50m short of expectations, and the furniture group Land of Leather saw its shares more than halved as it issued a stark profit warning.

There have been some winners on the high street. John Lewis turned in a sparkling performance over Christmas, both at its department stores and its Waitrose supermarkets, although it also warned that 2008 will be a tough year.

Rose, however, said M&S could not be compared with John Lewis: "They had a good Christmas. Well done to them. But they fish in a smaller pond and a slightly more exclusive pond than we do ... They don't compete, head to head, with Tesco and Asda on things like men's underpants."

Separately, Asda said it had a record Christmas but the Wal-Mart-owned supermarket did not provide any sales or profit figures to back its claim.

Ian Dyson, M&S finance director, said he believed his company had done "a pretty good job" in challenging conditions and that it had held on to its recent market share gains.

Its growth plans are still in place, he said. "We have had nine quarters of like-for-like growth; this is one quarter of decline. This business is in as good a shape as it has ever been."

However, plans to invest a further £1bn-£1.5bn in the coming year on revamping stores are now "under review". The retailer has so far updated 70% of its stores at a cost of £1.5bn.

Retail analysts had been hoping M&S would push profits back through the £1bn mark for the first time in a decade but the poor Christmas performance and warning on the year ahead will now see those forecasts cut back. Philip Dorgan , an analyst at Panmure Gordon, described the figures as "dreadful" and cut his forecast by 7% to £988m.

Rose added his voice to the growing calls for a cut in interest rates to relieve pressure on consumers. The Bank of England's monetary policy committee began its two-day meeting today and will announce its decision on interest rates at noon tomorrow.

At one stage today, M&S shares hit 398p — less than the 400p that the billionaire retailer Sir Philip Green considered offering for M&S in 2004 - but closed at 409.25p.

Rose, however, said comparing the two prices was like "comparing a pear and an apple", not least because "2004 was a bull market and now we have a bear market".

He insisted the M&S business was in good shape. He described it as "a very strong business, undergeared, it has increased its dividend, has very good covenants, has a very good offer, stocks under control and is making a lot of money. It is not in any way a disaster."

He later waded into the market to demonstrate his confidence in the business, buying £1m of M&S shares. Chairman Lord Burns and food boss Steven Esom also invested, each buying £100,000 worth, while Carl Leaver, brought in to lead the chain's international expansion, spent £70,000.

Shares tumbled across the retail sector as the scale of M&S's downturn sank in.