Teachable Moment

M&S is learning valuable lessons during the lockdown, despite declining sales and profits.

LONDON — Lockdown may well be the making — or remaking — of Marks & Spencer, according to chief executive officer Steve Rowe as the store reported a near 40 percent drop in year-end profits to 27.4 million pounds and revenue of 10.18 billion pounds, 2 percent lower than last year.

While the food-to-fashion retailer may have been hit hard by COVID-19, as it was forced to close large parts of the shop floor to prioritize food and items such as underwear, it has witnessed a spike in the online business and, in a matter of a few frenzied weeks, has become a leaner, more focused and efficient business.

“The trauma of the COVID-19 crisis has galvanized our colleagues to secure the future of the business,” Rowe said on Wednesday. “Most importantly, working habits have been transformed and we have discovered we can work in a faster, leaner, more effective way. I am determined to act now to capture this and deliver a renewed, more agile business in a world that will never be the same again.”

To wit, Rowe has launched a strategy called “Never the Same Again” to draw on lessons from the crisis and to drive transformation in a changing consumer environment.

“The crisis illustrated how differently we can use technology, run stores, and make decisions fast. In a business with a history of slow cultural change, we intend to use these lessons,” he said, pointing out that a smaller “top team” has been making decisions faster and more efficiently while numerous working groups, committees and “elaborate management processes” have been disbanded.

He said employees at all levels have been multitasking, while the retailer is learning how to compete with other online players and become leaner and more integrated.

The enforced reduction in future order volumes in clothing, due to the crisis, has finally forced M&S to change and slim down its ranges and to depend on fewer, core suppliers.

The latter move is a key one for M&S, which has struggled with supply-chain issues for years, flooding its shop floors with too much product that eventually had to be discounted, and failing to restock other in-demand styles in good time.

Looking ahead, the company said, due to the crisis, fall 2020 stock will be reduced while the role of the sourcing offices will be increased so that sampling, ordering and quality issues are dealt with offshore. Meanwhile, a faster, “near-sourcing” supply chain will be developed to enable the test and reorder seasonal fashion lines quickly for the online business.

Tearing a page out of other retailers’ books, M&S said its online and large store platforms will be opened to “complementary guest brands” in the future in order to broaden the appeal and increase online growth.

Rowe, like other British industry chiefs, acknowledged that the aftershocks of the coronavirus will endure for the coming year and beyond, and “while some customer habits will return to normal, others have changed forever. The trend toward digital has been accelerated, and changes to the shape of the high street brought forward,” he said.

While the pandemic may have dented profits and sales in the 12 months to

March 28, Rowe said the store has been outperforming its “COVID-19 scenario,” with cashflow more than 150 million pounds better than originally planned in the first weeks of the current year, largely driven by strong trading, particularly in food and online.

The company said while in-store sales in the clothing and home division were reduced to “a trickle” due to the closure of floor space during the lockdown, sales of essentials increased from 252,000 pounds per week in the first week of lockdown to 1.4 million pounds per week by week six.

Clothing and home has, meanwhile, seen a “gradual uplift,” and in the last three weeks, online sales have been running 20 percent higher year-on-year. The company said its stand-alone Simply Food stores have traded strongly, up 17 percent in the same period.

The store said looking ahead, the clothing and home division will see a 70 percent decline in revenue for the four months to July, and only a gradual return to original budgeted levels by February 2021, impacting annual revenue by about 1.5 billion pounds.

Food sales will drop by 20 percent for the four months to July, with revenue level after that. The decline will impact annual revenue by about 0.4 billion pounds.

In fiscal 2019-20, profit before tax and adjusting items was 403.1 million, reflecting an adverse profit impact of 52 million pounds in March, which the company attributed to COVID-19.

During the year, the retailer acquired 50 percent of Ocado Retail, the online grocer. While the stock market initially gave this move the thumbs-down, the tie-up proved to be critical for M&S Food during the lockdown. M&S said Ocado Retail delivered 40.4 percent revenue growth for the nine weeks to May 3.

During the last year, the store said it took “more than 1 billion pounds of actions,” including 500 million in planned cost reductions and further moves to manage cash under scenarioplanning for COVID-19.

It also has 1.4 billion pounds in emergency cash set aside, having worked with banks on its revolving credit facility and accepted 300 million pounds from the U.K. government’s Corporate Financing Facility.

The company said that prior to the COVID-19 impact, both food and clothing and home were making “good progress” in its restructuring programs, with food outperforming the market and men’s clothing ranges, kid’s, women’s and lingerie starting to show “sustained, improved performance.”

During the year, clothing and home revenue declined 8.3 percent overall, including an estimated 2.2 percent adverse impact from COVID-19 in March. Online revenue was flat, the retailer said.

The company is also finding ways to shift and manage all of the clothing stock on the darkened shop floors. M&S closed fiscal 2019-20 with clothing and home stock of about 500 million pounds and said that earlier this year it had committed to forward orders of 560 million pounds.

It said it has since canceled late summer stock, which will no longer be required, reducing forward commitment at cost by 100 million pounds. It has not canceled forward orders of seasonless, basic product where it trades strongly and which can be carried forward at low risk.

Of the unsold seasonal stock, the company said it has made plans to “hibernate” around 200 million pounds worth of merchandise until spring 2021. It has secured storage facilities and planned for the related costs. The store said it has taken a charge of 145.3 million pounds in adjusting items to reflect the cumulative impact of the combined handling, clearance, hibernation and write- off of the stock “bulge.”

Royal Bank of Canada said it was “encouraged” by sales of food, but wants M&S to work harder on honing its clothing offer.

“Despite its material exposure to clothing, we think that M&S’s major business food (65 percent of sales, 55 percent of profit) should benefit going forward from consumers’ desire to stay healthy, buy more fresh food and cook more at home. We see an opportunity for M&S to differentiate in food and to benefit from improved customer value for money perception, and from its JV with Ocado Retail in the longer term.”

The bank said it would like to see M&S be “more aggressive” in moving away from fashion and would expect it to announce more store closures once it has a better sense of “the new normal.” So far, the retailer has closed 54 out of 110 shops.