Crunch time for M&S and Debenhams as consumer mood lifts

Crunch time could be fast approaching for two venerable high street retailers and their bosses.

Marc Bolland at Marks and Spencer and Michael Sharp at Debenhams are set to update the City on their trading in the coming weeks, with investors wondering if a more buoyant consumer mood will banish years of underperformance.

"The market backdrop is pretty favourable. There are no excuses," says John Stevenson, analyst at Peel Hunt.

At M&S, which updates on fourth quarter trading on Thursday, people familiar with the situation suggest that sales of clothing and homewares have picked up compared with this time last year.

A year ago, M&S had just unveiled its new-look website, after a £150m investment. Not only did it suffer teething problems, but M&S stopped marketing the site as it did not want customers to overwhelm it.

Meanwhile, sales over the past three months compare with a period a year ago when much of Britain suffered from extreme weather in February, although conditions warmed up later in March.

According to Fraser Ramzan at Nomura, analysis of clothing market share data from Kantar Worldpanel, the consumer research group, showed a "large improvement at M&S", with sales rising 5.9 per cent in the four weeks to February 15.

People familiar with the situation also expect profit margins to have improved, following a shake-up of suppliers.

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"It is a question of how much of the improvement is optical, and how much is real," says Tony Shiret, analyst at Espirito Santo.

Citi, joint broker to the company, forecasts flat underlying sales of general merchandise in the four weeks to the end of March. This would be the first time for 15 quarters that M&S has not reported a decline in like-for-like sales of clothing and homewares. Citi also forecasts flat underlying food sales.

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The consensus of analysts forecasts is for a 1.2 per cent decline in fourth quarter underlying clothing and home sales.

Nevertheless, an improving picture in clothing and homeware would be a fillip for Mr Bolland, who has already presided over an almost 30 per cent increase in the share price in the past six months.

With sales stabilising, and the share price at its highest level since January 2008, headhunters suggest it could also be an opportune moment for Mr Bolland to think about his next career move, particularly as he will have been chief executive for five years in May.

If the environment is more reassuring for Mr Bolland, the opposite is true for Michael Sharp at Debenhams, who is due to update the City in the middle of April.

Although Debenhams avoided a repeat of the sharp profit warning of Christmas 2013, its trading over the 2014 festive period was still disappointing.

Some big shareholders are talking to the Debenhams board, demanding that the company improve its performance and rethink its strategy.

The shares are up 30 per cent since October, but according to analysts at Morgan Stanley, they are still trading at an about 30 per cent discount to the sector.

Mr Sharp has become a focus for shareholder concerns, given that his strategies so far have had mixed results. Indeed, 2013 was marked by a string of profit warnings and the departure of Debenhams' finance director.

Some shareholders are worried about Debenhams' online direction, although it has improved its service since Christmas 2013, when it lagged behind rivals.

One top 10 shareholder in Debenhams said: "The company's shares and performance are trailing rivals."

A top 20 shareholder added: "Sharp needs to get to grips with the internet as other retailers like Next have done and start offering a more coherent and effective strategy."

< > Last year, shareholders made tentative approaches to two executives outside the company, according to two people familiar with the situation, although this did not progress any further.

If this were not enough to contend with, Sports Direct has taken out derivative contracts that could give it almost 13 per cent in Debenhams.

"For me, I would say the pressure is probably more on Debenhams," says Kate Calvert, analyst at Investec.

Debenhams declined to comment, although people familiar with the situation say the board is "very supportive" of Mr Sharp and his strategy.

The retailer, alongside trying to rein in promotions, is experimenting with new concessions in stores, including units from Sports Direct, Monsoon, Mothercare and Costa Coffee.

But some analysts suggest change at the top may not be a silver bullet.

Debenhams is squeezed in the middle market between the value players and more upmarket retailers, and faces its sales being cannibalised by the shift online. Meanwhile, concern is rising that although consumers are better off, the recovery is bypassing many clothing retailers.

"I'm not sure that the problem is solvable. Its making the best of a tough job," says Mr Shiret. "There is not going to be a magic wand."

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