UPDATE 3-M&S shows pain of turnaround plan with 10% profit fall

Marks & Spencer asked to be judged on how it is changing as much as its financial results on Wednesday, as the British retailer reported a third straight drop in annual profits. The 135-year-old mainstay of Britain's shopping streets is closing weaker stores, revamping ranges and investing online, trying to avoid the fate of a string of UK chains that have collapsed amid competition from the internet and rising costs.

But after several failed reboots over the past decade, the jury is out on whether it can rise to the challenges posed by fast-fashion chains such as Zara and H&M in its clothing business, or thrive in a notoriously competitive UK food market. Despite a 10% percent drop in annual profit - not including 438.6 million pounds ($556 million) of one-off costs mostly linked to its latest turnaround plan - Marks and Spencer (M&S) highlighted "green shoots" of recovery and said it would step-up its reinvention.

"We will continue to accelerate the change, with our transformation becoming bigger, bolder and faster," Chief Executive Steve Rowe told reporters. However, M&S shares were down 4% at 0940 GMT, extending year-on-year losses to 11%, as it also announced the terms of a discounted rights issue to partly fund a joint venture with online grocer Ocado announced in February.

That drop has once again put M&S in danger of falling out of the FTSE 100, of which it has been a member since the blue-chip index began in 1984. M&S set out on its latest turnaround plan shortly after retail veteran Archie Norman joined as chairman in 2017 to work alongside Rowe, who became CEO in 2016 and has been with the company for almost three decades.

The company said in May last year it was targeting sustainable, profitable growth in three to five years. "At this stage we are judging ourselves as much by the pace of change as by the trading outcomes," said Rowe.

'GREEN SHOOTS' M&S made a pretax profit before one-off items of 523.2 million pounds in the year to March 31 - slightly better than analysts' average forecast of 519 million pounds, but down from 580.9 million in 2017-18.

A decade ago, it made a profit of 1 billion pounds. Clothing and home like-for-like sales fell 1.3% in M&S's fourth quarter, while food sales were down 1.5% on the same basis. However, adjusting for this year's later Easter food sales were up 0.4% and clothing & home sales down 0.9%.

"Whilst there are green shoots, we have not been consistent in our delivery in a number of areas of the business," said Rowe. "M&S is changing faster than at any time in my career - substantial changes across the business to our processes, ranges and operations and this has constrained this year's performance, particularly in clothing & home," he said.

He said poor availability meant M&S sold out of a number of fast selling clothing lines in the fourth quarter. While he expected some improvement in trading in both clothing & home and food in the year ahead, progress was likely to be weighted to the second half.

Trading in the first seven weeks of the 2019-20 year was in line with the board's expectations, although the pattern of trade remained volatile. "We expect M&S' main food business to continue to underperform the sector while it seeks to improve its ranges and customer value for money perception," said RBC Europe Richard Chamberlain.

CLOSURES AND OPENINGS After closing 35 full-line clothing & home stores in 2018-19, M&S expects to shut a further 85 and about 25 small "Simply Food" stores.

Its strategy for food is to give customers access to its full product range, so it also plans to open around 75 bigger food stores by 2023-24. M&S wants to make at least a third of its clothing & home sales online by 2022 and as part of its transition in food struck a 1.5 billion pound deal with Ocado, giving it a home delivery service from September 2020 at the latest.

M&S is financing the deal by raising 601 million pounds in a 1-for-5 rights issue at 185 pence a share, as well as a 40% dividend cut, with a reduced final dividend for 2018-19 of 7.1 pence per share. M&S's full-year statutory pretax profit, which includes one-off costs such as 222.1 million pounds related to store closures, was 84.6 million pounds.

($1 = 0.7875 pounds) (Reporting by James Davey; Editing by Kate Holton and Mark Potter)