HIGH street giant Marks & Spencer has reported "recovering profitability" in the Republic, but said it will take time to mitigate the impact of Brexit on its food operation across the border.
Publishing half-year results on Wednesday, the retailer said it experienced a “strong sales performance” in its clothing and home business across the Republic for the 26 weeks to October 1 2022.
But M&S said its food business “continued to be impacted by substantial costs and disruption related to EU border processes”.
The retail giant, which has 41 stores on the island of Ireland, including 19 in the Republic, said: “In time, the continued investment in automation and substitution with Irish-sourced product will mitigate some of these costs.”
Last month, the company announced a trial with Irish service station chain Applegreen to stock M&S food products in five locations.
On Wednesday, M&S said the deal, which started in November, would “support the growth of the core business”.
M&S has been the most vocal of the supermarket chains over the impact of the Northern Ireland Protocol on its operations here.
Last week, the retailer said it will reinstate its Christmas food ordering service in Northern Ireland.
The north was excluded in 2021 after M&S claimed there was “too much risk” in guaranteeing supply of certain products.
In its latest trading update, M&S said the protocol is still considered a potential risk for its business, as part of the overall complexity from the post-Brexit trading environment.
But M&S said the cost of living crisis will have the biggest impact on its business in the coming period.
This morning it warned over a "gathering storm" ahead as it forecast a steep slump in customer demand next year and said more price hikes are on the way.
The retailer said while sales were so far proving resilient and customers are "determined" to spend over Christmas, trading will become much tougher in the new year as the cost-of-living crisis hits hard.
Shares in M&S fell 6 per cent in morning trading on Wednesday as it forecast a "material contraction" in market demand over its next financial year.
It predicted a raft of retailers will go bust as the pressures take their toll.
The chain said the M&S shopper is set to prove more resilient, while a recent overhaul at the group "may provide some insulation from the gathering storm".
It has reined in price rises where it can, passing on price increases of around 8 per cent across its food halls versus an 11 per cent rise in its own costs.
But it lifted clothing and home prices by about 7 per cent in the first half and is set to increase these further as the pound's slump against the US dollar makes it more expensive for the group to buy in stock.
M&S said: "We expect market conditions to become more challenging in 2023-24.
"The combined impacts of the cost-of-living squeeze and the most marked rise in the cost of doing business for many years are creating pressure on margins industry-wide.
"All parts of the retail sector will be affected, and this will result in unviable capacity leaving the industry, creating opportunities for the leaner players who remain."
The gloomy outlook came as it reported a 23.7 per cent fall in underlying pre-tax profits to £205.5 million in the six months to October 1 as it saw double-digit inflation in food costs and suffered a £700,000 loss in its Ocado retail joint venture.
Profits were also knocked by the cost of higher property taxes after the end of business rates relief, as well as its exit from Russia.
M&S said like-for-like sales jumped 13.7 per cent across its resurgent clothing and home division as its bounce-back gathers pace, while comparable sales lifted 3 per cent across its food business.
But underlying earnings in the food division slumped to £71.8m from £124m a year earlier as costs weighed on the division.
M&S said it expects to post full-year pre-tax profits "similar" to the guidance it set out previously, with most analysts expecting a fall in underlying profits to £397m against £523m in 2021-22.
The company said trading in the first four weeks of its all-important second half was in line with its forecasts, with sales up 4.2 per cent in clothing and home, 3 per cent higher for food and 4.1 per cent ahead in its international business.
Chief executive Stuart Machin said customers were prioritising Christmas spend, with a recent poll showing its shoppers have already bought around 30 per cent of their festive gifts.
But he said "we are trying to brace ourselves" for a post-Christmas spending clampdown.
"We're very focused on the early part of next year, where some of these cost headwinds for households will hit," he said.
It is looking to make savings of around £150m in 2023-24 to offset soaring inflation and help it weather the tougher trading.
M&S recently said it is speeding up a major shake-up of its stores estate, which will result in the closure of 67 larger shops as part of long-term plans to axe 110 stores under a sweeping overhaul led by previous boss Steve Rowe.
Susannah Streeter at Hargreaves Lansdown said the restructuring was "showing great strides of progress".
"However, there are signs in the last four weeks that demand is weakening, as cost-of-living headwinds whip up and with costs set to stay elevated it's clear the next year will be challenging," she said.
