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(Reuters) - British retailer Marks & Spencer Plc believes its costly expansion plan is paying off and winning support from investors even after suffering its second straight drop in first-half earnings.

Shares in Britain's biggest clothing retailer, which also sells homewares and upmarket food, edged higher as its 3 percent profit fall was not as bad as most had forecast, reflecting a recovery in non-food sales in the second quarter after a dismal first three months.

Chief Executive Marc Bolland is 18 months into a three-year plan to make M&S an international, multi-channel retailer - connecting with customers through stores, the Internet, tablets and mobile phones.

The group, a mainstay of many British town centers and best known for reasonably priced but high quality staples such as socks and underwear, is spending 2.4 billion pounds ($3.8 billion) over three years on store re-vamps, logistics, IT and systems, with selective investment overseas.

Some have questioned the pace of change and the amount of money needed to achieve it, but Alan Stewart, chief finance officer, told reporters: "Our investors are very very supportive of us.

"The very clear message they give us is that they view their investment as an investment which they value for the long term, (they say) don't be distracted by short-term market issues, don't be distracted from your strategy and don't be diverted."
Some analysts say the strategy needs to start paying off.

"Bolland will have to get profits moving up at M&S if he wants to keep his job," said independent retail analyst Nick Bubb, while Bethany Hocking at brokerage Investec said: "We continue to have concerns on M&S and view a successful bid as unlikely," referring to the takeover speculation that has buoyed the stock in recent months.

The 128-year-old M&S, which attracts 21 million Britons a week to its 730 UK stores and has 390 stores in 44 countries overseas, has had a tough 2012.

In May Bolland slashed its three-year sales growth target, blaming the recession, and in July he shook up his general merchandise management team after the group reported its biggest quarterly sales drop for 3-1/2 years.
He blamed wet summer weather and stock management issues that left stores short of bestselling womenswear lines.

SHORT-TERM ISSUES
But despite difficult trading, shares in the firm have risen 14 percent over the last three months, buoyed by persistent speculation regarding a possible bid from private equity or a sovereign wealth fund.

Sales from M&S's British stores open more than a year were flat in the second quarter to September 29, with a 1.8 percent fall in general merchandise sales - spanning clothing, footwear and homewares - offset by a 1.6 percent rise in food.

Analysts had forecast a 2.5 percent fall in like-for-like general merchandise sales and a 1.5 percent rise in food.

The general merchandise outcome represented a significant improvement on the 6.8 percent drop in the first quarter.

"We took steps to address the short-term ... issues in general merchandise and as a result, we delivered an improved performance," said Bolland.

He said stock levels were back to normal and the firm had supported its advertising with bigger buys of on-trend products.

Though the UK is out of recession, many retailers are still struggling as consumers hold back spending in the face of inflation, meager wage increases and government austerity measures. Last week electricals retailer Comet collapsed into administration, threatening 6,600 jobs.

An industry survey published on Tuesday said British retail sales slowed sharply in October, dampening hopes that consumers will drive the economic recovery.

"The consumer is a little bit more confident but still cautious and finding it hard going," said Bolland.

He said recent trading had been "volatile", making M&S cautious about the outlook for the rest of the year, though it was "well set up" for the Christmas trading period.

M&S made a profit before tax and one-off items of 297 million pounds ($474.4 million) in the 26 weeks to September 29, at the top end of the range of forecasts between 250 million pounds and 305 million, according to a company poll, but down from a pro-forma 307 million in the same period last year.

M&S shares were up 1 percent at 392p by 1119 GMT, not far from a 1-1/2 year peak of 398p set last week.

The profit fall compares poorly with recent relatively positive updates from rivals Next, Debenhams and ASOS, while Primark-owner AB Foods posted a 17 percent rise in yearly profit.