Marks & Spencer (MKS) 221p

Gain to date: 23.8%

Original entry point: Buy at 178.5p, 2 September 2021

Shares in high street stalwart Marks & Spencer (MKS) have further to rise as it continues to demonstrate strong progress in transforming the business.

It delivered a better trading performance over the third quarter and especially over the Christmas period than we or the analyst community dared to think possible.

For the 12 weeks to 1 January, sales climbed to £3.27 billion, an 18.5% increase on the previous year and impressively 8.6% above the same period in 2019.

The star performer, which few people foresaw, was clothing and home rather than food, with UK sales jumping 37.7% on the previous year and 3.2% on 2019 to top £1 billion.

On a two-year basis, online revenue from the clothing and home business was up more than 50% which suggests that the firm has finally got its web offering right.

For analysts at Numis, the two-year group sales growth rate was 1% above their forecast and 2% above the consensus with every division beating expectations including the international business, for so long the poor relation.

Management says it is ‘more confident’ of its ability to hit its increased pre-tax earnings guidance of around £500m, and barring further lockdowns or restrictions now expects to deliver at least that amount.

Numis expects consensus forecasts to rise ‘modestly’ from £515 million to around £525 million, but on the quiet still believes the group can hits its high-end estimate of £560 million if the top-line momentum shown in the fourth quarter continues over the final three months of the year.

Which begs the question, why did the shares fall nearly 8% on the day of the results? To begin with, the stock had already enjoyed a sensational move up after the half-year trading update in November so it was inevitable some ‘loose’ holders of the stock would cash in whatever happened.

Second, the fact guidance was almost left unchanged disappointed the momentum crowd, who were expecting another big upside catalyst for the shares.

Our view is their loss is our gain. As chief executive Steve Rowe claimed, the results demonstrate just how much the firm has improved its product offering and its value proposition in the last year or so.

Clothing and home may have been the big surprise, but food sales were also outstanding with M&S racking up the fastest growth of any store-based food retailer during the quarter and its highest ever Christmas till roll.

‘I remain encouraged that our transformation plan is now driving performance’ says Rowe, and we concur. There are still tough times to come, particularly as consumers battle rising energy bills, but Marks finally looks to have got its positioning right.

SHARES SAYS: Long-term investors should buy the sell-off before the next re-rating phase. 

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