M&S slashes staff bonus

5pm BST update


* Fiona Walsh, business editor
* guardian.co.uk,
* Tuesday May 20 2008

Marks & Spencer has pushed its profits through the £1bn barrier for the first time in 10 years, but said it will slash bonus payments for staff as it warned that trading conditions on the high street remained tough.

Underlying profits for the year to end March rose by 4.3% to a whisker above £1bn, on sales 5.1% higher at £9bn. Shareholders saw their dividend raised by 23% to 22.5p a share.

M&S became the first British retailer to post profits of £1bn in 1996/7, under then-chief executive Sir Richard Greenbury. Profits remained above £1bn the following year but then went into a steep decline as the group lost its way amid a series of boardroom upheavals.

Analysts expect M&S's break back through the £1bn profits barrier tol be brief, however, with some forecasting a fall to £900m or less in the current year as the consumer spending slowdown takes its toll.

Chief executive Sir Stuart Rose, who was parachuted in four years ago to rescue M&S from the clutches of retail billionaire Sir Philip Green, warned today that market conditions will remain difficult "for the foreseeable future".

But he is confident M&S will be able to survive the spending slowdown: "Three or four years ago M&S was a weak business in a strong market. Now we are a strong business in a weak market."

While M&S had a good year last year, despite tougher economic conditions in the second half, it missed its profit targets and will not be paying a bonus.

"If we don't meet the targets, it's tough luck," he said. "We did not earn the bonus this year."

Last year Rose received a bonus of £2.6m, part of £91m paid out to the board and head office staff. They will go without payments this year, although bonuses totalling £3.8m will be awarded to head office staff in parts of the business that did meet targets – the international division and the online operation.

Store staff will also get bonuses although the payout, at £12.8m, is just half the £26m they received a year ago. Rose said store staff deserved the payment - "they are the ones that have done the hard work. I hope next year we can do something more for them."

Despite the consumer spending slowdown, M&S is pressing ahead with its expansion plans, both in the UK and internationally. It is opening its first store in China this year and is expanding its operations in India.

"We believe there is a real opportunity to expand our business in the UK and abroad, to stretch the brand into new product areas and to develop our Direct business," said Rose.

'Watching brief' on TV ads

Capital expenditure is planned at £800-900m this year, which he said demonstrated the board's confidence in the long-term future of the business. But cost savings of around £50m have been targeted, and will include a reduction in marketing costs. M&S spent £144m on marketing last year, including its television fashion advertising campaign featuring models Twiggy, Erin O'Connor and Elizabeth Jagger. Marketing director Steven Sharp said there were no plans to axe the campaign, which has proved popular with customers, but the group was "keeping a watching brief" on it.

On the international side, the group saw operating profits jump by 33%, to £116.4m, on sales up almost 17% at £713m. M&S Direct had "an excellent year", with website sales surging over 60%. The group has a target of £500m on sales online by 2010/11.

Total underlying sales for the year to end March were down 0.5% in the UK and trading since the year end has been extremely volatile, Rose said. April was difficult but the better weather in May brought a "marked improvement".

M&S shares, which have lost a quarter of their value this year, closed down more than 5% at 396p.

Richard Hunter, head of UK equities at Hargreaves Lansdown, highlighted the increase in the dividend, which he said showed "a level of management confidence in the business which is not necessarily echoed by their outlook".

Retail analyst Nick Bubb at Pali, who has a sell recommendation on the shares, pointed out that while profits may have reached the £1bn mark, a year ago the City had been expecting M&S to make more than £1.1bn.

Guidance on the current year is "slightly negative," Bubb said: "M&S have found £50m of other cost savings, but they can't slash the staff bonus twice." The main driver of cost growth this year is the huge amount of new space that the group is bringing on stream "and there is not much that M&S can do to slow that down".

He believes the store refit programme, which has cost M&S £1bn in the past three years, has been a flop and warns there will be growing pressure on profits. He is forecasting a 4% fall in like-for-like non-food sales and a 2% drop in food sales this year and expects profit forecasts to come down from their current £925m to between £875m and £900m.