Marks & Spencer Group PLC on Friday said it expects the Covid-19 pandemic to weigh heavily on the performance of its clothing and home and international businesses and hurt profit.
Shares in Marks & Spencer closed 8.2p lower to 107.8p following the statement.
While the food business "remained strong", M&S said its final pre-tax profit for its financial year ending March 31 might be at the bottom end of the £440 million to £460 million range due to "very depressed trading in clothing and home".
The company's pre-tax profit forecast outturn in its final quarter so far, before adjusting items, was hurt by Covid-19 but remained within the range of market expectations and its previous guidance until this week.
Although the Clothing & Home and International divisions are "likely to be severely impacted" for the next 9 to 12 months, the extent of this is unknown, and M&S said it currently cannot give "meaningful guidance on future earnings".
The clothing, food and homeware retailer stated that it is still "confident" in the future of its business once the crisis surrounding the virus is over and has been running various scenarios assessing the potential damage to profit, sales, and cash flows.
M&S said it will need to manage costs associated with its Clothing & Home division, but does "expect to be able to redeploy significant numbers of colleagues to support the Food business".
M&S is preparing for the possibility of temporary store closures but noted that its "business model of operating parallel Clothing and Food businesses" combined with a strategy of moving online, "should provide more resilience than some single-sector businesses".
At a minimum, Clothing & Home revenue will fall in the first three to four months of its 2021 financial year, though may improve over the summer. Margins are likely to suffer due to surplus unsold seasonal stocks and the likelihood of "clearance activity in the marketplace". As such, the retailer is taking steps to defer its supply.
At present, M&S is not assuming it will return to normal trading in Autumn - though its food business is forecast "to trade profitably throughout".
So far, it has seen some benefit from customers stocking up but its "heavy bias to chilled and fresh" means it did not experience "the forward buying uplift experienced by the major grocers".
Nonetheless, a move towards eating at home during the pandemic is likely to "continue to benefit sales in the months ahead".
Supply disruption is expected, though not predicted to be "prolonged or financially material". Its International business, however, will likely see a significant drop in sales as many of its markets "are adversely affected by local outbreaks of the virus and in some cases lockdown and closures".
Also on the horizon are further costs associated with Brexit, which will likely hurt its Irish and French businesses starting at the end of the year.
M&S said it welcomes the UK business rates holiday extension, having paid GBP180 million in business rates on stores in Britain last year.
The company has postponed capital commitments and has committed to spend only around GBP80 million of its planned GBP400 million financial 2021 capital expenditures.
M&S will redeploy all staff from Clothing & Home into Food if practical and will defer all pay increases. It also plans to grow its online business.
Non-essential spending will be reduced at all levels, with non-essential recruitment frozen and marketing spend reduced. It is cutting its supply pipeline by more than GBP100 million and holding over stock.
M&S does not expect to pay a final dividend for its 2020 financial year, saving around GBP130 million, and will review its policy along with its interim results in November.
At present, the company has a GBP1.1 billion undrawn revolving credit facility maturing April 2023, and another GBP50 million of uncommitted facilities. It also has cash balances totalling approximately GBP185 million. Its total liquidity is GBP1.34 billion.
M&S's revolving credit facility has a single financial covenant, "that the ratio of earnings before interest, tax, depreciation, amortisation to net interest plus IFRS16 depreciation will not be less than 2.6 times at the date of measurement, tested semi-annually by reference to the preceding 12 months". M&S said it is tough to makes forecasts but it will monitor its compliance with this covenant.
"While there are many uncertainties, we expect to come through this period in a strengthened competitive position. We have a strong Food business and can balance activity between our operations under the single M&S brand. We have a well-developed online proposition in Clothing & Home and a 50% shareholding in Ocado Retail, the UK's fastest growing pure play online retailer. M&S is a strongly cash generative business and has access to very substantial facilities and liquidity," M&S said.
"The board remains confident of the transformation programme and does not believe that the long-term value of M&S beyond the coming year will be impacted by the virus," it added.
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