M&S is forced to grow overseas

The Investment Column

Marks & Spencer remains the supertanker of UK retailing, but its overseas expansion programme is taking the stores group into uncharted waters. Led by its irascible captain, Sir Richard Greenbury, this year the group will double capital expenditure on its foreign stores to around pounds 120m, or roughly a third of the total budgeted spend of pounds 350m. Around half the increase in space planned for 1996-97 will be overseas, which represents a step change on previous years.

In the past, Marks has been content to allow its relatively small North American and European operations to chug along while the UK made all the running. But half-year figures yesterday gave a clue to the imperative which is driving the group overseas. Pre-tax profits 12 per cent higher at pounds 430m in the six months to September disappointed the market, sending the shares down 26p to 483p.

Sales in the UK climbed 8.4 per cent to pounds 2.84bn in the half, a healthy performance even after stripping out the effects of new stores, which would probably reduce that figure by 1 percentage point or so.

Yet despite the top line growth, operating margins refused to budge above an admittedly highly respectable 12 per cent. Indeed costs rose around 9 per cent in the period, wrong-footing some analysts.

Marks took on an extra 1,500 staff last year and is in the throes of adding another 2,250, increasing UK staff numbers by around 6 per cent this year. That looks generous against the 3 per cent rise in store space expected and it is clear that, despite signs of a revival in consumer spending in Britain, Marks at least thinks it will have to work harder in terms of service to win and maintain the loyalty of shoppers.

Such prudence is probably justified, given recent sales trends. Clothing, footwear and gifts, still the backbone of the business, turned in a sound 8.8 per cent rise to pounds 1.51bn in the six months. Home furnishings, up 27 per cent off a low base to pounds 104m, is tanking ahead on the back of the revived housing market.

But although Marks has retained its market share, the food sector, up 6.6 per cent, remains under pressure. Volume growth decelerated between the first and second quarters and prices are also not rising as fast as they were.

These are probably quibbles now, but Marks is right to be thinking of the future. Sir Richard's boast that there are 80 places in the UK where a new store or extension could double sales just demonstrates the constraints on further expansion in the home market. Yet the latest pounds 12.9m profits from overseas businesses, hailed as their first meaningful contribution, have taken years to achieve and are expensive. Opening costs for four new stores in Europe were pounds 6.8m, or 61 per cent of first-half turnover.

Profits of around pounds 1.1bn this year would put the shares on a forward multiple of 18. High enough for now.