Marks & Spencer Shares Slump

LONDON — Marks & Spencer's shares dropped 32.5 percent Wednesday on the London Stock Exchange after the British retailer said sales rose 1.3 percent in the first quarter, but like-for-like sales fell sharply across all key categories.

M&S' shares dropped 78 pence, or $1.54 at current exchange, to close at 240 pence, or $4.75.

The company released a trading update a week early after Stuart Rose, chairman of M&S, said sales had encountered a further slowdown over the past three weeks. "We've seen pretty volatile trading April, May and June," said Rose during a conference call Wednesday.

U.K. sales in the 13 weeks to June 28 declined 0.5 percent during the period, while clothing sales fell by 3.6 percent, and home sales, by 5.1 percent. International sales rose 24.5 percent.

On a like-for-like basis, U.K. sales declined 5.3 percent, while general merchandise sales, which include clothing, dropped 6.2 percent. While food sales grew 1.6 percent during the period, on a like-for-like basis, they were down 4.5 percent. Food sales have been one of the retailer's strongest-performing categories for years, and the drop might indicate how deep the U.K.'s economic woes are biting into consumers' wallets. M&S focuses on fresh and prepared foods, which generally are more expensive than those sold at other British supermarkets.

In a further sign of how seriously M&S takes the decline in food sales, the retailer on Wednesday replaced the executive who oversees the division. John Dixon, who was previously director of home at M&S and director of M&S Direct, the company's e-commerce site, now will oversee food. Dixon replaces Steven Esom, who was appointed head of food in June 2007. Dixon will report to Rose.

"Steven has done a good job for the business, but he came in at a time when we were facing a more robust economy," said Rose. "We're now in a slightly different place, and we need a different horse for a different course."

Rose described the current economic climate in the U.K. as "the fastest and most severe slowdown since the early Nineties," during the conference call.

Rose attributed the slowdown to declining consumer confidence levels and a challenging economic environment. "The customer is definitely feeling the pinch....We have been seeing changes in behavior," he said. "At our preliminary results in May, we reported a mixed start to our 2008-09 financial year and expressed caution about consumer sentiment," Rose added. "Since then, consumer confidence levels have deteriorated markedly and market conditions have become more challenging."

In contrast, in the final quarter of the 2007-08 fiscal year, U.K. sales rose 3.7 percent and general merchandise sales rose 0.1 percent. On a like-for-like basis, sales declined 1.7 percent in the fourth quarter.

"[There are] no surprises to us that the sales figures are very poor," said Freddie George, research analyst at Seymour Pierce in London, in a research note Wednesday. "Our major concern, however, is that, not only have sales been weak, but also gross margins....We believe heavy promotional activity on fashion, home and food will have impacted gross margins."

George forecast pretax profits of 825 million pounds, or $1.6 billion, for M&S in the 2008-09 financial year, which he described as at "the low end of the range." The company will release second-quarter results Nov. 4.