M&S boss Bolland heads for exit

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M&S boss Bolland heads for exit
In a third-quarter that mixed exceptional performance from its food business with a warm-weather shocker from the general merchandise (GM) department, it's the earlier-than-expected retirement of Marks and Spencer (MKS) boss Marc Bolland which stole headlines Thursday.

A keenly-followed turnaround at M&S under Bolland's leadership hardly set the market alight, although his was a long-term rather than quick-fix strategy. Industry conditions have also been particularly difficult, which perhaps masks some of the progress made.

Indeed, the share price had risen by around a third in the six years since Bolland took over, hitting 600p last May. But bearish sentiment across global equity markets has sunk M&S along with many others.

Stepping into Bolland's shoes is M&S lifer Steve Rowe. His 25 years at the retailer made him the obvious successor, with deeper knowledge of the business than most. On the board since 2012 and executive director of GM since last year, Rowe has run both the food and clothes divisions and overseen the e-commerce operation.

M&S shares are down over 1% Thursday, but that's better than others. Gross margin at GM was ahead of expectations, full-year guidance is raised to +200-250 basis points (bps), and consensus estimates for annual pre-tax profit of £680 million are likely to remain unchanged. That's up nearly 3% on last year.

"[The] shares [are] benefiting from a handful of drivers including raised profits guidance to the top-end of the range thanks to continued cautious bean-counting to support margins in the face of persistent deflationary pressures," explains Accendo Markets analyst Mike van Dulken.

"The planned 2016 retirement by CEO Marc Bolland, who has failed to turn the 'socks 'n' pants' seller around, may also be seen as a positive, hoping the next guy does better. Either that or investors have unwavering faith in a rebound in General Merchandise, hoping a winter chill blows soon."

But he's optimistic: "After breaking back below 445p on Monday, support has already emerged at 427p thanks to rising lows dating back to early September 2011. Should sentiment see a bullish revival, a rebound towards 500p could be on the cards."

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Investors were sceptical about Bolland's hefty wage bill when he took the helm in May 2010. It took a £7.5 million "golden hello" to lure him from Morrisons (MRW). Throw a £975,000 salary together with an annual bonus and share plan of up to 250% and 400% of salary respectively, it is clear see why. M&S will pay Rowe £810,000 a year to head up the company, while Bolland will continue to receive his salary, benefits and pension each month until January next year.

Has Bolland been worth it?

"We believe that MB has done a good job in running M&S consistently along a modernising agenda during a very difficult period, during which the more short-term approach of the previous management had to be reversed and the industry has faced major structural changes on both sides of M&S's operations," say analysts from Haitong Securities.

A brief look over the figures shows that group revenue has risen 8% in the six years since Bolland took charge, with current forecasts flat on the year at £10.3 billion. Operating profit had sunk by a fifth to £763 million at the last full-year results, with adjusted pre-tax profit falling 5% to £661 million. Investec thinks it will make £692 million in 2016.

The basic comparison looks stagnant, but a closer examination of trading in the 13 weeks to 26 December show more activity. Food had the "best ever Christmas" with sales jumping 3.7%, outperforming the market by 17% in the crucial Christmas week and reflecting 25 consecutive months of growth.

But this doesn't mask disappointing GM sales, which sank 5% on the back of unseasonal weather and availability and reversed the much-celebrated progress made in the last quarter.

Unlike many in the retail space, Marks refrained from discounting its goods in a bid to get customers to the tills in the run up to Christmas. That explains the margin guidance. The group's online offering has also strengthened, with traffic numbers jumping a fifth.

"With weak comps, 3Q16 was supposed to be the quarter when M&S finally demonstrated General Merchandise was back on track," explains Investec analyst Kate Calvert. "However, in keeping with others, the weather has spoilt the party, though self-help and a more flexible business model have limited the profit impact."

After the shares' recent derating, the analyst doesn't believe M&S's strong cash flow and potential for capital return and self-help are reflected. Given poor performance across the sector, however, the broker's price target is snipped by 20p to a still-bullish 570p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.