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Thursday, January 15, 2009

Marks & Spencer Chops Costs as Sales Slide

As posted by: Wall Street Journal

LONDON -- Marks & Spencer PLC is slashing costs by shutting stores and firing employees, but the moves may not be enough to weather the drop in consumer spending, potentially forcing the British retailer to cut its dividend.

Shoppers pass British retailer Marks and Spencer's flagship Marble Arch store in London Tuesday.

The cost cutting, which includes closing 27 of 600 stores and the reduction of 1,230 jobs, or 1.6% of its work force, caps a difficult holiday season. On Wednesday, Executive Chairman Stuart Rose said he expects economic conditions to remain challenging for at least another 12 months. He also rejected the possibility of his departure anytime soon.

"If this was an airplane flying through a storm, I don't think the best thing to do is go up front and shoot the pilot," he told reporters Wednesday.

Marks & Spencer's stock rose 2.2% to close at 244 pence ($3.65) in London Wednesday.

The question now is whether the cuts are sufficient to make up for the decline in sales volume and profit margins as British shoppers curb their spending in a worsening economy. Adding to Marks & Spencer's troubles is the weakness of the British pound, which will make it more costly to buy goods overseas. In addition, it is unclear how much discounting the store chain will have to do in coming months to preserve sales.

Many analysts now predict Marks & Spencer will reduce its dividend.

"We will retain our negative stance on M&S partly because we expect further downgrading of consensus profit estimates, partly because a full-year dividend cut now looks inevitable and partly because the company, in our view, is in disarray with none of its many strategic issues any nearer to resolution," Credit Suisse Group analyst Tony Shiret said in report.

Marks & Spencer said it wasn't changing its dividend policy and would review the issue in May. The company paid 14.2 pence a share for the second half of fiscal 2008 and 8.3 pence a share for the first half of the current fiscal year, which ends in March.

For the 13 weeks to Dec. 27, the 125-year-old company reported that same-store sales fell 7.1% from a year earlier -- the steepest quarterly drop in a decade -- despite massive pre-Christmas promotions and long-term discount offers in the food department.

The price cuts also hurt Marks & Spencer's gross profit margin. The retailer said the gross margin at its U.K. stores would be 1.75 percentage points lower than last year's gross margin of 43%.