Marks & Spencer to Cut Costs after Sales Slump

Britain's Marks & Spencer (M&S) will cut costs and step up promotions after posting its worst quarterly sales fall in 3 years as a trio of UK retailers reported tougher trading on Thursday.

The clothing, food and homewares group posted a 6.1 percent drop in second-quarter core sales and warned that shoppers were "increasingly cautious about their budgets".

Fashion label Ted Baker and bicycle retailer Halfords also said trading was tough.

Ted Baker said pretax profit rose by 5.4 percent to 7.4 million pounds ($13.19 million) for the 28 weeks to Aug. 9 but expressed caution about the second half in which it traditionally makes most of its profit.

"We remain understandably cautious about trading in the second half of the year," said founder and chief executive Ray Kelvin.

Halfords, which has about 450 stores selling bicycles, car radios and spark plugs, said quarterly like-for-like group sales fell by 1.1 percent, though rose by 1.5 percent including new stores.

"I remain encouraged by our prospects for the remainder of the year," Chief Executive David Wild said, as Halfords amid the gloom looked to benefit from people switching to bikes from cars as petrol prices remain high.

Britain's shoppers are struggling with higher food and fuel costs while house prices fall at the fastest rate for 17 years.

Consumer Worries

"Consumers are worried about inflation...interest rates... the equity value of their houses...the safety of the pound in the bank," said M&S Chairman Stuart Rose. "There needs a serious amount of confidence put back."

He urged governments to stabilize the banking system and said a cut in UK interest rates next Thursday would be "a very encouraging signal that the peak in interest rates has been reached." Rose said it would be "a brave person to say we're at the bottom" of the economic downturn.

House prices fell 12.4 percent in September from a year earlier in the biggest fall since comparable records began in 1991, building society Nationwide said.

Consumers face tougher lending conditions, too, after a Bank of England survey showed banks expected to tighten credit for households and businesses after third-quarter credit conditions worsened.

'Price War Going On'

Marks & Spencer, whose 600-plus British stores are visited by more than 21 million people every week, has been one of the biggest casualties of the downturn in spending as shoppers desert its upmarket food halls for cheaper rivals.

Rose forecast a "very difficult" Christmas for the non-food retail sector as a whole and said the food sector would be "even more difficult".

"There's the biggest price war going on you've seen for a long time (in food)," he said.

M&S' UK like-for-like sales of clothing and homewares fell 6.4 percent in the 13 weeks to Sept. 27. Food sales were down 5.9 percent.

M&S said it had stepped up promotions in a bid to lure cash-strapped shoppers, which would hit profitability, but pledged to cut capital spending plans by opening fewer stores than planned next year and by slowing shop refits.

Citi analysts said they expected the market consensus profit forecast of 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 the year.

Rose, who survived a shareholder rebellion in July over his move to combine the roles of chief executive and chairman, admitted mistakes had also been made, particularly with poor pricing and stock availability in food.

But he insisted the firm was addressing these issues and that he was the right man for the job.

"This is a time for steady hands on the tiller .... tough times require some tough actions and some seasoned old chaps. I think I'm a seasoned old chap," he said.

M&S shares were up 8.1 percent at the close. M&S shares jumped as analysts said investors were relieved that its dividend was safe for the year and believed its planned measures would safeguard profits.

"With the worst Christmas for at least 30 years coming up for non-food retailers we wouldn't get carried away," said Pali 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." M&S shares are down by more than two-thirds in the last 18 months.

Copyright 2008 Reuters. Click for restrictions.