Marks & Spencer Group Plc warned yesterday full-year profits would be well below market hopes and confirmed fears of a Christmas sales flop that forced huge mark-downs in its end-of-season sale.
M&S, which last year fended off a £9 billion bid approach from retail tycoon Philip Green, said it expected profit before tax and exceptional items to be within a £600 million to £625 million range in the year to March.
Analysts' consensus forecast had been around £675 million, although many had been expected to reduce their estimates following the trading statement.
Chief Executive Stuart Rose, brought in last year to fight off Mr Green, said M&S had built up too much stock and struggled to clear it in the run-up to Christmas, leading to an estimated £40 million of mark-down costs in its second half.
M&S shares fell as much as 2.8 per cent in early trade, but recovered to stand 1.25 per cent higher at 343 pence by 1030 GMT.
Paul Mumford, a fund manager at Cavendish Asset Management, said investors were giving Mr Rose the benefit of the doubt as the weak Christmas was a result of failings of the previous management under Roger Holmes that were now being flushed through the system.
Markets were also hoping for a fresh takeover bid, either from Green or another party, he said.
"This company is looking pretty vulnerable," Mr Mumford said. Mr Green, owner of Bhs department stores and the Arcadia fashion chain, was not immediately available for comment, but one London-based analyst said the prospects of a third bid campaign from the successful entrepreneur were receding.
"He's got troubles of his own in a failing market, and it will be harder than ever to convince his backers to stump up on a turnaround case - he certainly wouldn't offer anything like four pounds a share now," the analyst said.
Analysts had been bracing for a poor Christmas performance from M&S after gloomy updates from clothing firm Next and general stores chain Woolworths earlier this week.
Recent interest rate rises, high levels of consumer debt and falling house prices are all reining in consumer spending, long the driving force of UK economic growth. Moves into non-food lines by supermarket groups like Tesco and Asda have accentuated the problem for general retailers.
M&S, one of a string of store chains to bring forward their Christmas trading updates, said like-for-like sales on a comparable trading week basis were down 5.6 per cent in the six weeks to January 3, with clothing off 4.9 per cent and homewares down 23.3 per cent. Food sales were down 1.7 per cent.
Mr Rose said he would run M&S's stock levels more tightly in the future in a difficult trading environment, and that a recovery plan he announced in July remained on track.
"You can't judge the business's recovery on this Christmas. It's (the stock overhang) something we've had to digest. We've digested it and it cost us a little bit more than we thought," he told reporters on a conference call.
"We are very cautious about the outlook but if I run it (M&S) leaner than the cautious outlook, every expectation is that you should be able to run the business without the accidents in terms of stock overhangs we had last year," he said.
Analysts at Investec Securities cut their full-year profit forecast to £610 million from £655 million and their forecast for 2005/6 to 725 million from 758 million.
Mr Rose said M&S saw a three per cent rise in shoppers at its stores over Christmas, helped by a TV advertising campaign. So although the potential for recovery is there, the fact that sales fell during the period underlines the scale of the problem he faces.
But the CEO said he was confident the recovery strategy announced in July, including £250 million of cost savings in 2005/6 and a renewed focus on women's clothing, would eventually bear fruit.
Discounting in the end-of-season was heavier than usual, with the average discount not far short of 50 per cent as the fallen retail icon strove to rid itself of failing lines. M&S's stock commitment following the sale is around 26 per cent lower than at the same time last year.
"We start the spring with a clean slate and that was what I wanted to do," he said.