MAKSY Marks and Spencer Group (QX)

LONDON—Marks & Spencer Group PLC reported a 24% drop in half-year profit on higher costs, even as the British retailer raised its margin outlook for the year, crediting sourcing gains.

M&S, a mainstay of the U.K. high street, reported net profit of £ 172.7 million ($266.2 million) for the six months to Sept. 26, compared with £ 228.3 million in the first half of last year. Revenue rose 1% to £ 4.95 billion.

Operating costs climbed 2.2% to £ 1.62 billion on cost rises tied to staffing, marketing and support functions.

The company raised its interim dividend by 6.3% to 6.8 pence per share, a move that comes after it unveiled a £ 150 million share buyback program in May.

M&S's shares have been on a roller coaster this year, rising strongly until May on the back of what investors saw as improved clothing sales, before sagging due to a weaker trend in clothing over the summer.

The company has long grappled with falling sales in the nonfood division, and has been working to improve quality and availability and sell more fashionable clothing. The company in September hired a new head of womenswear, design and beauty.

The margin in M&S's so-called general merchandise—which includes clothing and home—rose by 2.85 percentage points and the company also said it is raising its full-year guidance for the margin to be between 2 and 2.5 percentage points higher, up from its prior view of 1.5 to 2 percentage points.

M&S has been focused on improving the clothing division's margin, hiring Hong Kong-based brothers Mark and Neal Lindsey, known as the architect of rival Next PLC's successful supply chain, to revamp its sourcing.

"In General Merchandise we decided to improve profitability by focusing on gross margin, delivering another significant increase, which in part resulted in slightly lower sales," said Chief Executive Marc Bolland.

Sales in general merchandise fell 1.2% on a like-for-like basis. M&S said the division was impacted by "unseasonal conditions resulting in high levels of promotional activity, particularly in the first quarter." In the second quarter the company decided to step away from discounting, which impacted sales.

Meanwhile, in the food division, sales edged up 0.2% on a like-for-like basis. Here however, M&S said the gross margin was 0.25 percentage points lower due to a slightly higher level of waste, caused by what the company called "unseasonal conditions over the summer."

M&S has been continuing to work to set itself apart from mainstream grocers, which have seen sales slide as customers flock to discounters. The company opened 32 food stores in the first half of the year and introduced nearly 900 new food products.

M&S's international business reported a 5.1% revenue decline as the company was hit by currency volatility in Europe and said markets like Russia, Ukraine and Turkey and the Gulf remained challenging.

M&S recently said it would close 12 small stores in Croatia, Bulgaria, Montenegro, Serbia and Slovenia by May 2016 after being unable to find a way to make them commercially viable.

Revenue in the U.K.--by far M&S's biggest market—climbed 1.7%, reflecting strong growth in food.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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(END) Dow Jones Newswires

November 04, 2015 04:25 ET (09:25 GMT)

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