Marks & Spencer said yesterday that the retail environment is set to become “more challenging”, as it announced its highest profits since 1998 and record bonuses for staff.

Shares slid 4.7 per cent to 703½p as Stuart Rose, the chief executive, said: “Competition remains intense and pressure on consumer spending as a result of interest-rate rises will also increase.”

M&S revealed that pretax profits, before exceptional items, had risen 28.5 per cent to £965.2 million, in line with most expectations. Sales rose 10.1 per cent to £8.6 billion.

The company delivered record earnings per share of 40.4p, 38 per cent higher than its 1998 heyday, as Mr Rose’s turnaround plan brought customers back into stores.

BACKGROUND

• M&S bows to pressure over top bonuses

• Marks & Spencer chief reaps bonus benefit

• How the M&S boss turned green

• Marks & Spencer ousts retail director in broad reshuffle

• Rose’s turnaround plan is paying off for M&S

M&S comment: Quite an achievement

Stuart Rose has achieved the biggest high street turnaround in years

Related Internet Links

• Marks & Spencer company information

• Marks & Spencer share price chart

• Marks & Spencer forecast

Yet shares were hit by concerns about plans to increase spending to between £850 million and £950 million this year and next on till systems and supply chain improvements, up from £792.4 million last year.

Disappointment that M&S had failed to hit its target of a 1 percentage point increase in gross margins also drove down shares. The company said that margins had risen just 0.6 percentage points because it had needed to discount more heavily than thought to clear stock in January and February.

M&S said that trading was “satisfactory” and that underlying sales had risen by 3.8 per cent in the three months to March 31, compared to a 6.1 per cent rise for the year to March 31. Some analysts expressed concern at a slowdown in underlying food sales to 3 per cent in the final quarter, but Mr Rose said that he was happy with performance and that M&S had increased market share in all areas.

He said that the slowdown in sales growth in the final quarter was partly attributable to strong trading in the comparable period a year before. “We have not yet seen the impact of interest rates, but clearly we don’t like it.”

In the year ahead M&S is to step up expansion abroad, with plans for 35 to 40 new stores.

Mr Rose said that M&S wanted to expand its operations in India, Ireland and China but would also consider going back into European countries such as France, from which it pulled out in 2001. M&S said that Carl Leaver, its new international director, is expected to update the City on his plans in November.

Mr Rose said that this year M&S expects to find the majority of its growth in the UK. “Traction will be coming from getting UK M&S back where it should be, because that’s where we went wrong last time,” he said.

He plans to open seven new mainline stores this year and another 100 Simply Food outlets. The company will also be driving sales online, through its recently revamped website. Sales rose 60 per cent over the year and Mr Rose said that growth had stepped up since.

Richard Ratner, of Seymour Pierce, said: “Although life will get tougher, with strong comparatives for the first three quarters, the company is well positioned with clothing and food to ride a likely retail down-turn better than most.”

— George Davies, the head of per una, will earn more in cash terms than Stuart Rose, Marks & Spencer’s chief executive, this year after delivering a 20 per cent rise in sales at the brand. Mr Davies, who earns a salary of £1.2 million, is in line for a cash bonus thought to be equivalent to about 100 per cent of his salary after exceeding targets. Mr Rose is in line for a payout of £3.5 million including a £2.3 million bonus, but 60 per cent of his bonus will be paid in shares.

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