Looking back to the days of my youth, growing up in Toronto, I remember my mother taking my younger brother and me to the local mall to pick up new clothes every now and then. In those days, much of my wardrobe came from good old Marks and Spencer. My mom loved that store, and just about everything from our socks and underclothes to the cookies she served to friends with tea was purchased there.

I mentioned this to Michael the other day over the telephone, and, sure enough, he too used to shop for his children's clothes at Marks and Spencer whenever he was in London and the Cayman Islands. Sadly, these shopping trips have disappeared for Canadians and American visitors, because this store has vanished from the malls in this area.

I am reminiscing today for a reason.

Marks and Spencer seems to have a lot more to worry about these days than where Meg Jackson and Michael Lombardi buy their socks.

The British company's year-end profits (to April 2, 2005) were down 19% before tax. Now, UK retail sales, in general, are down about 1.7%--a concerning trend, but nothing like a staggering 19% drop.

Six consecutive quarters of falling sales have even the talking heads at the 100-year-old retailer feeling pessimistic. On Wednesday of this week, in response to the lost revenue figures, company Chief Executive Stuart Rose said, "Conditions are tough. You have seen the statements from other retailers. We are in for a difficult six to nine months."

The company, as one of the UK's leading retailers of clothing, food, and home products, sees 10 million people pass through its doors in its 375 stores every week. The company also has franchises in Europe, the Middle East, Asia, and the Far East, as well as wholly owned stores in the Republic of Ireland and Hong Kong. US grocers Kings Super Markets is also owned by Marks and Spencer.

What's behind the drop in sales for this big-name retailer?

The UK consumer economy is largely to blame. In the low interest rate environment in Britain over the last couple of years, UK consumers racked up a mind-blowing £1 trillion of personal debt. With interest rates now rising, consumers are more concerned with how they'll make their next monthly payment than they are with buying new clothes. Bad consumer debts have even the credit card lenders sweating, with Barclays shares down 4% yesterday as a result.

Marks and Spencer's pricing strategies, or lack thereof, are also a major detriment to its sales. The company sells a wide range of products, at virtually every price point you can think of, which makes the company hard to define in terms of its market segment.

Company executives say that its earnings were also severely affected by the company's need to deeply discount product pricing over the past 12 months to reduce a massive inventory build-up.

While the ailing company has some new directions to pursue in the coming months, including new store designs, updated bakeries, new delis, an introduction of hot take-out foods, and a new Deputy Chairman of the Board (Lord Terry Burns) starting in October, it's pretty clear to me that flashy new signage and a few rotisserie chickens aren't going to put money back in the empty pockets of the consumers that the company badly depends on.

Going forward, UK and international shoppers may need to find new places to buy their socks, or perhaps even learn to knit their own, as Marks and Spencer continues on a downward spiral. North American consumers, on the other hand, better start getting their debt under control, otherwise we could see a similar story soon from major US retailers.

Back to Michael for Some Closing Comments

I'm off to lunch soon with two of my buddies in the new home building business. These guys have executive positions at two of the largest private home builders. I often get together with them to see how new home sales are going, what the industry is saying about demand, and to hear the latest on the ratio of people qualifying these days on mortgage applications. Are people putting down 5%, 10%, 25% or more these days when they buy a home? Are they even qualifying for a mortgage any more? I'll find out and report back to you next week in PROFIT CONFIDENTIAL.