M&S slashes dividend as succession plan suffers setback

Chief executive warns of a deterioration in margins

The task of finding a chief executive to succeed Sir Stuart Rose at Marks and Spencer became even more difficult yesterday as a leading candidate resigned and the retailer posted a 40 per cent slump in profits and risked the ire of its private shareholders by slashing its dividend for the first time in nearly a decade.

The downbeat statement came as Sir Stuart forecast that the high street bellwether's UK gross margins would deteriorate further this year, and said he had not seen any green shoots of recovery. However, he was upbeat about M&S's launch this week of a new marketing slogan, "quality worth every penny", and the introduction of a mid-range sub-brand of casualwear for men and women, called Indigo.

The resignation of Carl Leaver, the director of international, home and M&S Direct, came after he was told his responsibilities for its home business and e-commerce were being given to other executives. Mr Leaver and Steve Esom, the former head of food who left after about a year in the job, both joined M&S in 2007 and were considered to be strong candidates to succeed Sir Stuart when he steps down, which will be no later than 31 July 2011.

Mr Leaver will stay on for a few more months but his departure leaves Ian Dyson, the group finance and operations director, and Kate Bostock, the executive director of clothing, as the two internal frontrunners for the top job. Yesterday, Sir Stuart said any announcement about his successor was unlikely this year, but the group expected to appoint someone next year. He again reiterated his desire for an internal candidate to succeed him, but Justin King, the Sainsbury's chief executive, is considered to be a potentially stronger candidate.

City analysts are far from decided if either internal candidate will get the job, although Mr Dyson's chances are considered better than Ms Bostock's. Tony Shiret, an analyst at Credit Suisse, said: "Her range of experience is not that wide and she has been in charge of clothing and that has performed very poorly."

Ms Bostock has also been given responsibility for M&S's home division, while Mr Dyson's has been put in overall charge of a new transformation programme called "2020 – Doing the right thing", that seeks to make M&S more efficient in key areas, including multi-channel, international operations and communications with customers. Nick Bubb, an analyst at Pali International, said M&S was pointing at Mr Dyson being the "lead candidate but he is not a shoo-in". He added: "I don't think he is massively popular in the City."

M&S said it would slash its dividend by a third to 15p a share from the current 22.5p a share. Its final dividend for 2008-9 has been reduced to 9.5p a share, which will be followed by a reduction of 2009-10 interim dividend to 5.5p a share. Sir Stuart added: "The outlook is uncertain and we need our balance sheet to retain its strength and flexibility." The dividend cut will save about £120m on an annualised basis.

For the 52 weeks ended 28 March 2009, the group's adjusted pre-tax profits fell by 40 per cent to £604.4m. M&S's UK like-for-like general merchandise sales, largely clothing, fell by 6.9 per cent and underlying food sales fell by 5 per cent. Sir Stuart said it had been a "challenging" year for sales of menswear and womenswear, suggesting that it had lost market share, but childrenswear and lingerie sales fared better. Total sales were boosted by a 25 per cent uplift in international markets and M&S will lower its capital expenditure to £400m this year from £652m last year.

On the UK economy, Sir Stuart said: "There is more stability. It has not got any worse and that is good because last year it got worse evevery week."