UK stores fret over Christmas as M&S profit falls

LONDON - Weak October sales and profit falls from top store groups Marks & Spencer Plc and Primark frayed British retailers' nerves as the crucial Christmas countdown began.

Industry group the British Retail Consortium (BRC) said on Tuesday a 0.6 percent year-on-year fall in October sales from stores open more than a year augured badly for festive trade.

"This is evidence of the basic weakness of consumer confidence and demand and (is) worrying this close to Christmas," BRC Director General Stephen Robertson said.

He urged UK finance minister George Osborne to use his Nov. 29 statement to ease the pressure on shoppers and store groups alike by reining in planned increases in fuel duty and business rates.

While retailers are hopeful of stronger demand this Christmas than last, when sales were hit by heavy December snow, analysts say recent weak trading has left stores with high stocks that could lead to a frenzy of discounting.

Britons have been curbing spending as disposable incomes are squeezed by rising prices, muted wages growth and government austerity measures, and as they worry about a stagnant housing market, job security and a fragile economic recovery.

Marks & Spencer (M&S), Britain's biggest clothing retailer which also sells homewares and upmarket clothing, described the trading environment as "increasingly promotional" and said full-year gross profit margins would be flat as a result, at the bottom end of previous guidance.

But Chief Executive Marc Bolland said the firm's second half had started in line with its expectations and said it was well set up for Christmas this year.

"What customers tell us is that they want to protect Christmas... Smaller treats, they definitely want, so that's exactly why they will turn to us," he told reporters.

However, their feedback suggested they also plan to go out less, particularly on New Year's Eve, he added.

"That's also not particularly bad for us. Because that would mean that they would stay at home for something like a Dine In For 2 (meal) or a Dine In For 4."

Analysts at brokerage Shore Capital said Christmas was shaping up to be a repeat of the past few years, with little growth and weaker players driven out of business.

"Expect further failure from the weak; others will simply eat their market share," they forecast.

PROFITS SQUEEZED, STORE PILOTS POSITIVE

M&S, which serves 21 million Britons a week from around 700 stores and has over 350, mainly franchised, stores overseas, said profit before tax and one-off items fell 10 percent to 315.2 million pounds ($505 million) in the 26 weeks to Oct. 1.

That was just ahead of analysts' average forecast of 311 million, according to a company poll.

Sales from British stores open more than a year fell 0.7 percent in the second quarter, the first quarterly decline for two years, with a 2.5 percent drop in general merchandise sales only partly offset by a 1 percent rise in food.

The 127-year-old group, which is investing in its UK stores, online and overseas business, said it expected full-year capital spending would reach 700-750 million pounds, down from its previous guidance of 900 million.

Finance Director Alan Stewart said this reflected timing issues rather than any problems with the plan to spend 600 million pounds over three years revamping stores.

That programme has seen 15 pilot stores launched, with customer feedback, according to Bolland, "very positive".

Stewart also highlighted improved guidance for a 3 percent rise in operating costs in the 2011/12 year.

Analysts said the results were broadly in line with expectations, following recent profit downgrades, and M&S shares were up 2.9 percent at 335 pence at 1018 GMT, having fallen 18 percent over the last six months.

"We believe that self-help, new channels and effective marketing can yet lead to pleasant surprises on the upside," the Shore Capital analysts said.

Clothing chains have been feeling extra pressure from unseasonably warm weather, higher cotton prices and wage inflation in key manufacturing countries such as China.

Discount clothing chain Primark showed the pain from these costs with an 8 percent drop in adjusted operating profit to 309 million pounds for the year ended Sept. 17.

The chain, owned by Associated British Foods , said a recent fall in cotton prices should ease the pressure in the coming financial year, although that would take time to feed through.

AB Foods shares were up 1.9 percent at 1,134 pence.

By Mark Potter and James Davey