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M&S raises profit margin forecast for clothing despite sales dip

Shares in Marks & Spencer rallied 3.5 percent on Wednesday after the British retailer raised its annual forecast for margins in clothing and homewares, even though quarterly sales fell in this troubled division.

The 131-year-old group also beat forecasts for first-half profit and increased its dividend, sending its shares up 3.7 percent.

Carl Court | AFP | Getty Images

The performance is likely to give a boost to Chief Executive Marc Bolland, who, rather than chasing unprofitable sales has focused on gross margins - the difference between the price M&S pays for goods and the price it sells them - through improvements in sourcing operations.

The company said sales of general merchandise, spanning clothing, footwear and homewares, at stores open over a year, fell 1.9 percent in the 13 weeks to Sept. 26, its fiscal second quarter.

That compares to analysts' forecasts in a range of flat to down 2.0 percent, with a consensus of down 1.2 percent, and a first quarter fall of 0.4 percent.

M&S said the sales performance reflected unseasonal conditions and a decision to focus on full price sales.

M&S's non-food division increased its gross margin by a greater than expected 2.85 percentage points in the first half and it raised full-year guidance to up 2 to 2.5 percentage points from up 1 to 1.5 percentage points previously.

"We delivered good underlying profit growth in the first half and made strong progress against our key priorities," Bolland said.

M&S reported a 6.1 percent rise in first-half underlying pretax profit to 284 million pounds ($437.96 million), ahead of analysts' average forecast of 270 million pounds.

While UK profits rose 14.6 percent, overall profit growth was dragged back by a weak international performance, where profit fell 52 percent.

Second quarter like-for-like sales in M&S's food business rose 0.2 percent, a 24th straight quarterly increase.

M&S food is outperforming Britain's grocery industry, benefiting from product innovation and a focus on providing for special occasions.

M&S shares have risen 29 percent over the last year on hopes that the billions of pounds spent by Bolland on the redesign of products, stores, supply chain logistics and the website, to address decades of under investment, will pay off.

But his critics argue that increasing gross margins alone is not a source of long-term growth.

M&S's results are the first since Steve Rowe switched from running the food business to heading the general merchandise arm.

Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers, said the improving margins, profits and dividend were all welcome.

"The largest challenge remains in the form of sales within General Merchandise, where M&S is focusing on margin improvements by eschewing discounts and concentrating on full price sales. This buys the company some time to rediscover the magic potion which may tempt younger shoppers into its stores."

Prior to Wednesday's update analysts were, on average, forecasting underlying pretax profit for the full 2015-16 year of 703 million pounds, up from 661 million pounds in 2014-15.

M&S raised its interim dividend by 6.3 percent to 6.8 pence.

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