3Q17 Update

M&S posted unusually strong top-line numbers in its core UK market, and comparable sales growth in its Clothing and Home segment was particularly impressive. The retailer joins a number of other major UK names, such as Tesco, Debenhams, Sainsbury’s and Morrisons, in exceeding sales expectations over the Christmas period (for more details, see our separate reports on these companies). M&S reported that 3Q17 sales were up 5.9% and up 4.3% on a constant currency basis. The closely watched UK Clothing and Home segment posted 3.1% total sales growth and 2.3% growth on a comparable basis. This was the first quarterly increase in the segment’s comps in nearly two years, and was ahead of the consensus estimate of a 0.2% decline. In the clothing category, better product ranges, availability and prices contributed to the improved performance. The company also substantially reduced its promotions in the quarter. The UK Food segment reported 5.6% total sales growth and 0.6% comparable sales growth, beating analysts’ forecast of a slight decline in comps. Total UK sales increased by 4.5% year over year and by 1.3% on a comparable basis, beating analysts’ expectations of 0.5% UK comparable store sales growth. International sales increased by 18.9% year over year in 3Q17 and by 2.9% on a constant currency basis. In the UK, M&S benefited from a number of factors, including weak comparatives in the prior year; calendar effects, as the quarter ended five days later than in the previous year and so included more of the post-Christmas sales period; and the closure of department store BHS in the summer of 2016. M&S estimated that the shift of the quarter-end positively affected UK Clothing and Home sales by about 1.5% and UK Food sales by about 0.3%.

Outlook

M&S maintained its FY17 guidance. Consensus estimates for FY17 revenue stand at £10.57 billion, implying flat year-over-year growth. Consensus expects operating profit of £675 million, implying a year-over-year decline of 14.0%. The FY17 consensus EPS estimate is 29 pence, implying a year-over-year decrease of 17.1%.