UPDATE: M&S Mirrors UK Retail As Non-Food Stalls, Food Soars

U.K. high-street bellwether Marks & Spencer Group PLC (MKS.LN) mirrored a divided retail sector Tuesday, reporting a rise in food sales but a decline in general merchandise sales as cash-strapped consumers held out for discounts, forcing M&S to lower margin guidance for the full year.

In a trading update for the 13 weeks to Dec. 31, the company said total U.K. same-store sales rose 0.5% excluding VAT, with general merchandise down 1.8%, below market forecasts of a decline of 1.5%. Food sales were up 3%, well ahead of market expectations for a 1.5% rise in sales.

The company said its full-year profit forecasts remain unchanged but heavy discounting in the face of competitive pressure over Christmas means the company now expects margins for the full year to be down, rather than flat as previously guided.

Still, cost savings would protect profits, the company said.

M&S's trend follows high street retail updates that have so far shown some sales growth in food, as cash-strapped consumers have been forced to pay more for their mealtime essentials amid rising food prices.

Like its upmarket rival Waitrose, which last week reported festive same-store sales up 3.8%, M&S's food business has been growing through the downturn, drawing in consumers who have traded down from dining out to cooking at home, innovating its prepared meals and offering a value range to attract more cost-conscious shoppers.

Still, Wm Morrison Supermarkets PLC (MRW.LN) Monday reported a marked slowdown in same-store sales growth though it managed to muster a 0.7% rise over the Christmas period. Rivals J Sainsbury PLC (SBRY.LN) and Tesco PLC (TSCO.LN) report seasonal sales Wednesday and Thursday respectively, and their larger exposure to non-food sales is expected to curtail any inflationary food boost.

Higher food sales have stymied discretionary spending on clothing, homewares, and other non-food items, with commensurate declines in non-food sales at high street stores.

Last week fashion retailer Next PLC (NXT.LN) reported sales from its high street stores fell 2.7% in the five months to Christmas, although total sales were positive because of strong revenue growth from online and its mail-order directory.

Also Tuesday, department store Debenhams PLC (DEB.LN) reported flat same-store sales in the 18 weeks to Jan. 7, although it said December sales were strong, supporting retail sales figures published earlier by the British Retail Consortium which showed same-store sales up 2.2% in December.

The surprise rise in retail sales was put down to easy comparable figures last year when heavy snow disrupted trade, and was also largely predicated on major discounting by retailers, eroding margins and potentially setting the scene for worse-than-expected profits when most retailers report full year results later in the year.

Like M&S, most retailers will have to look at further cost cuts and efficiencies if profits are to be protected, especially as 2012 is looking equally glum.

M&S said it continues to be cautious about the outlook for the year ahead and it expects trading conditions to remain challenging.

The retail sector has issued a chorus of cautious outlook statements as consumer confidence remains at record lows in the face of rising food and fuel costs, stagnant wage growth and job insecurity.

At 0829 GMT, M&S shares were up 7 pence, or 2.4%, at 316 pence, and Debenhams shares were up 4 pence, or 7.3%, at 61 pence.

-By Kathy Gordon, Dow Jones Newswires; 44-207-842-9293; kathy.gordon@dowjones.com

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