Not just an interim results statement… but an M&S interim results statement

“Marks & Spencer’s first-half results are so good that management’s biggest challenge now may be to stop analysts getting over-excited and prevent them from upgrading their numbers too much and setting too high a bar of expectations,” says AJ Bell investment director Russ Mould.

“Chief executive Stuart Machin’s outlook statement that profits will be first-half weighted, given ongoing investment, variable weather, rising interest rates and the uncertain economic outlook is perfectly prudent, but it runs counter to the traditional seasonality of the business. Further increases to consensus estimates look likely, as suggested by the gains in the share price following publication of the figures.

“M&S delivered an underlying first-half pre-tax profit of £360 million. That easily beats the £206 million earned in the same six-month period a year ago and – more importantly – demolishes the consensus analysts’ forecast of £260 million.

“That sets the scene for a second round of earnings forecast upgrades, following August’s unscheduled trading statement, even if management is understandably doing its best to stop the market from getting carried away.

“Going into the first-half results, analysts were looking for an adjusted pre-tax profit for the year of between £550 million and £600 million. M&S is well on its way, with £360 million earned in the first six months of fiscal 2024.

“It would be highly unusual for profits to fall in the second half to between £190 million and £240 million when, over the past decade, M&S has on average made £100 million more in the second half compared to the first, thanks to the seasonal boost from Christmas in particular.

Source: Company accounts. Fiscal year to March

“Equally, it could be dangerous to assume a second-half outturn of £460 million, given the work needed on the online business, the ongoing losses at Ocado Retail and continuing refurbishment of the store estate, let alone the uncertainties that face retailers in the form of the squeeze on consumer spending from inflation and higher interest rates and unpredictable weather.

“Nevertheless, even an outturn of £280 million to £290 million in the second half would take the consensus adjusted pre-tax figure to around £650 million, some 15% above where forecasts sat before publication of the first-half numbers (£560 million). A flat second half would imply £720 million, for a 25% upgrade to the best result since 2016, when the shares ended the year trading at around 300p.

“That degree of upgrade, and profit momentum, helps to explain why the shares are rising to fresh twelve-month highs.

Source: Company accounts, Marketscreener, analysts' consensus forecasts. Fiscal year to March

“Having been a bit of a punch-bag for those who used the firm as a bellwether for the (demise) of the High Street, M&S does seem to be on the right track, and a number of factors seem to be at work.

“First, UK wage growth remains strong and that is helping retailers, especially those whose demographic is the one that shops at Marks & Spencer.

“Second, the food offer retains its reputation for quality and providing a treat. It may therefore be benefitting from any consumers cutting down on eating out and looking to dine well at home instead.

“Third, the acquisition in 2022 of Gist, M&S Foods’ principal logistics provider, is providing scope for synergies and cost benefits and helping margins at the food business.

“Finally, the clothing and home business looks to be on a roll, after years in the doldrums. The arrival of key former Topshop executives (who were there when it was in its pomp before Sir Philip Green ran it into the ground) is leading to better ranges, faster stock turn, less discounting and better margins for the clothing range, which is regaining its standing with stylish shoppers. M&S always used to be good for at least one key, must-have piece a season and it looks to be on its way back to recapturing that form.

“Debt reduction improves the risk profile of the business as well and, from a share price perspective, less risk can mean a higher valuation.

“The shares may also benefit from ongoing scepticism about whether the turnaround is for real or not. M&S has been in turnaround mode for a decade and pre-tax profits peaked under Sir Stuart Rose in 2007.

“The more M&S can do to persuade the doubters, the more buyers there may be. As American market analyst, writer and publisher Jim Grant is fond of saying, ‘Successful investing is about having everyone agree with you… later.’

“The return of the dividend list with an interim distribution of 1p a share, four years after the last payment, suggests Mr Machin and colleagues think M&S is on the right track, despite their caution on the second half.”

Source: Company accounts. Fiscal year to March

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