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M&S gains sales momentum, shares run out of puff

Marks & Spencer Group Plc beat forecasts for Christmas sales yesterday as its recovery gathers momentum but shares in Britain's biggest clothing retailer eased after a blistering run.

The 122-year-old retail icon, whose stock has risen almost 50 per cent since September on signs it is outperforming rivals, said like-for-like sales rose 2.9 per cent in the 13 weeks to December 31, above analysts' top estimates of about two per cent.

But sales were led by a much stronger-than-expected performance in food rather than more profitable clothing and Chief Executive Stuart Rose said the retail landscape in Britain remained challenging, warning of rising costs such as utility and rent bills.

Following a short-lived recovery in 2002, Mr Rose is not yet confident enough to say the company's turnaround is permanent.

"I don't want to say that we're there yet," he told reporters. "Our top line sales growth, I think, will continue, but there are cost pressures coming through," he told Sky TV.

M&S, which operates from around 400 UK stores, said like-for-like food sales jumped 5.1 per cent in the third quarter, while non-food sales were up 0.8 per cent on the same basis, much as expected.

"We always said that food was less... 'damaged' than general merchandise in terms of customers perception", Mr Rose told analysts on a conference call.

In the second quarter, total like-for-like sales had risen 1.3 percent - the first rise for eight quarters. The non-food sales trend was still negative at that time.

"We are pleased with progress to date although there is further recovery potential to be realised, particularly in clothing," said David Cumming, the head of UK Equities at Standard Life Investments, which has a four per cent stake in M&S.

By 0947 GMT Marks & Spencer (M&S) shares were down 1.2 per cent at 495-3/4 pence, well above the 400p level at which tycoon Philip Green pitched a failed bid attempt in 2004. The stock closed at 510p on December 29, its highest since July 1998.

Last week the firm's biggest shareholder, US firm Brandes, reduced its still sizeable stake to bank some profits.

"It doesn't look as if there are going to be big upgrades today, and I think the stock needed big upgrades to hold over £5," said Nick Bubb, an analyst at Evolution Securities.

Analysts are forecasting pretax profit of around £708 million for the year to March 2006, up from about 592 million.

Morgan Stanley advised investors to switch from rival Next to M&S, raising its profit estimate to £730 million from £705 million on the increase in full price sales.

Mr Rose, who was parachuted into M&S to defend the company from Green's £9.1 billion bid, has cut back orders to minimise markdowns and has secured better buying terms to boost margins.

The company said full-price sales of non-food rose 5.3 per cent this quarter compared with a 0.4 per cent gain in the second quarter. Clearance stocks fell 35 per cent.

The British Retail Consortium said overnight that December sales across the sector saw their biggest rise in 19 months but retailers have warned there is no sign of a sustainable pick-up in consumer sentiment after a dreadful year in which consumers have reined in spending.

Mr Rose said the industry figures were boosted by discounts and food sales and showed a sharp drop-off after Christmas as the new year hangover set in.

"Early spring I think customers are going to be quite tough to attract, so I'm not too optimistic," he told reporters.

Main rival Next Plc last week echoed that view, saying its better-than-expected performance over Christmas was down to a helpful cold snap rather than any underlying improvement in consumer sentiment. Richard Ratner at Seymour Pierce believes that 2006 could be worse than 2005 "or at best as bad".

Mr Rose joined other industry figures in warning that costs were set to rise but said investors shouldn't be too concerned.

"Costs of fuel, utilities, rent and rates have risen sharply and will have an impact next year," he said.

On the conference call he reiterated that the retailer still expects to meet its target of £320 million cost savings for 2006/7. It is also on track to reduce markdowns by £100 million in the current year and intends to boost investment from next year dramatically to give over 30 per cent of stores a facelift by the end of 2006.

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