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magazineM&S return to profit suggests long-running turnaround could finally deliver
Marks & Spencer (MKS) 237p
Gain to date: 32.8%
Original entry point: Buy at 178.5p, 2 September 2021
High street institution Marks & Spencer (MKS) seems to be back in fashion with investors after it posted strong results for the first half of its financial year and significantly raised its full year outlook last week.
The group, which has been in turnaround mode for almost as long as anyone can remember, posted turnover for the six months to the start of October up 5% on the prior year to £5.1 billion.
The main driver of the increase was a 10.4% rise in food sales, which excluding hospitality and franchises rose an even more impressive 16.9% year on year.
Meanwhile, clothing and home sales were just 1% lower, helped by a stunning 17.3% increase in full price sales and fewer promotions, with online sales growing by more than 60%.
Even more pleasing, the clothing and home business grew its operating profit by more than 40% after its latest makeover.
As a result of these strong sales performances, pre-tax profit came in at £187 million against a forecast loss of around £10 million and a prior-year loss of £67 million.
Chief executive Steve Rowe was keen to manage expectations. ‘Given the history of M&S we’ve been clear that we won’t overclaim our progress,’ he said.
However, he added: ‘The hard yards of driving long term change are beginning to be borne out in our performance.’
There was further good news, with management pointing to ‘demonstrable scope for further improvement’ in the core business and raising its outlook for full year pre-tax profit to around £500 million compared with its August guidance of £300 million to £350 million and a consensus forecast of £435 million.
Once again, the firm tempered the better outlook with a reference to supply chain pressures and tax increases which mean ‘the cost incline becomes steeper in the second half and steeper again in the 2022/23 year’.
It also revealed that while it had clearly rebounded from the pandemic, it was still investing heavily to increase its market share in food and profit margins in home and clothing, meaning a return to regular dividends was ‘unlikely in the current year’.
Shareholders were in the mood to celebrate, however, sending the shares up 15% on the day and continuing to push them higher over the rest of the week.
Clive Black, head of research at Shore Capital and a well-respected watcher of retail stocks, promptly raised his 2021/22 profit forecast by 40%, likening the company’s two earnings upgrades this year to London buses. ‘You wait ages for one and another comes along right behind, and a double-decker at that.’
SHARES SAYS: It looks like M&S’s turnaround is bearing fruit, stick with it.
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