LONDON — Marks & Spencer plc is on the road to recovery, despite a 10.7 percent drop in profits for the year ended April 1.

Profits declined to 523.1 million pounds, or $934.5 million, from 586.2 million pounds, or $1.08 billion, in the previous year. But the decline was due exclusively to a tough comparison with the previous year, when M&S’ bottom line was boosted by the sale of M&S Money, its financial services division.

Stripping out that gain, profits last year would have risen by 18.3 percent.

Pretax profits last year rose 35 percent, to 751.4 million pounds, or $1.34 billion, from 556.1 million pounds, or $1.03 billion, in line with market expectations.

Sales rose 4.1 percent to 7.7 billion pounds, or $13.75 billion, from 7.4 billion pounds, or $13.66 billion. The increase came in all categories except clothing. Currency conversions were made at average exchange rates for the respective periods.

M&S executives didn’t crow about the year’s successes, however, and said there is still a long road ahead.

“M&S is beginning to regain its confidence, but we still have much to do to ensure that we sustain growth in the long term,” said Stuart Rose, the retailer’s chief executive. “We need to drive sales, grow market share, improve the performance of our existing stores and continue to buy better.”

Even Richard Ratner of Seymour Pierce, who has been one of Rose’s toughest critics, conceded that changes are happening for the good.

“Prices have been reduced, and better value is being offered,” said Ratner. “The concentration now will be on substantially increasing better and best sales, through improving value and a higher standard of visual merchandising.”

Although clothing sales picked up 4.4 percent in the second half, they were flat for the full year. Clothing has proved to be a difficult hurdle for the M&S turnaround team, as the store faces stiff competition from Zara, H&M and Topshop, as well as from supermarkets Tesco, Asda and Sainsbury’s.

“Clothing experienced a difficult first half as we continued to improve our product styling and pricing, change our buying practices and rationalize our brands,” said Rose.

This story first appeared in the May 24, 2006 issue of WWD. Subscribe Today.

On a more positive note, he added that the company has increased its share of the U.K.’s clothing market in terms of volume, to 9.9 percent from 9.7 percent last year.

During the last fiscal year, the retailer also introduced an open-to-buy policy that Rose said allows it to deliver the latest trends and chase fast-selling items.

The company boosted the amount of full-price sales to 30 percent, from 12 percent two years earlier, and said it has improved its buying and sourcing strategies.

Rose offered no specific guidance for the current year, and he said the whole team still needs to knuckle down. “Our focus will be on driving sales and market share from our existing space,” he said. “We will also begin to broaden our business, focusing on reaching a wider customer base and stretching our brand reach.”