M&S cuts cloth to cope with consumer downturn

Retailer Marks & Spencer is reining in investment, slashing costs and stepping up promotions amid signs of worsening consumer sentiment in the UK as house prices fall at the fastest rate for 17 years.
The clothing, food and homewares group posted a 6.1 percent drop in second-quarter core sales on Thursday and warned shoppers were "increasingly cautious about their budgets."
But shares in the 114-year-old group, which have plunged over two thirds in value over the past 18 months, jumped as much as 8.7 percent amid hopes the steps being taken will mean profit forecasts will not have to fall much further.
"With the worst Christmas for at least 30 years coming up for non-food retailers we wouldn't get carried away," said Pali International analyst Nick Bubb.
"But the shares have fallen far enough in the short term and M&S is off the hook for the time being."
Britain's shoppers are struggling with higher food and fuel costs, plunging house prices and growing economic uncertainty.
The Nationwide building society said house prices fell 1.7 percent in September on the month before and were down 12.4 percent on the same time last year, the biggest annual fall since comparable records began in 1991.
Fashion label Ted Baker said it had been hit by growing economic turmoil over the past two weeks, while car parts and bike retailer Halfords also said trading was tough, though it was benefiting from needs-driven purchases, such as for car maintenance.
M&S, Britain's biggest clothing retailer, said sales at stores open at least a year fell 6.1 percent in the 13 weeks to Sept. 27, broadly in line with expectations.
The group said it had stepped up promotions in a bid to lure cash-strapped shoppers and, as a result, UK gross margins — a measure of profitability — were likely to fall 1 percentage point this financial year.
But the firm — on the day that it opened its first shop in mainland China — also said it would cut capital spending to 700 million pounds from its previous forecast of 800 to 900 million, by reining in store refurbishments, and would reduce the figure further for next year to 400 million pounds.
Costs are also under pressure, with operating cost growth expected to be between 4 and 5 percent this financial year instead of the previous forecast of 7 percent.
"This statement is probably as bullish as it could be," said Panmure analyst Philip Dorgan.
"Pricing issues are being addressed, costs are being cut and the capex excesses reined back."
Citi analysts said they expected market consensus profit forecasts of around 690 million pounds for this financial year and 575 million for next year to remain unchanged. Forecasts have come down from over 1 billion pounds at the start of this year.
But analysts said the jury was out on whether M&S would have to cut its dividend next year, with Pali International's Bubb expecting a reduction to 16 pence a share from 22.5 pence.
M&S shares, which hit a 7-1/2 year low of 191.9 pence on Monday, were up 7.4 percent at 225.75 pence by 0810 GMT. Halfords was up 7 percent a 274 pence and Ted Baker down 4.4 pence at 330 pence.