Interactive Investor

ii view: M&S Christmas boom fails to boost shares

13th January 2022 10:46

Keith Bowman from interactive investor

Clothing & home has delivered growth for a second successive quarter. We assess prospects. 

Third-quarter trading update to 1 January

  • Total group sales up 8.6% compared to Q3 2019/20
  • UK clothing & home sales up 3.2%
  • UK food sales up 12.4%

Guidance:

  • Now expects full-year profit of “at least £500 million” from “in the region of £500 million” previously

Chief executive Steve Rowe said:

"Trading over the Christmas period has been strong, demonstrating the continued improvements we've made to product and value. Clothing & Home has delivered growth for the second successive quarter, supported by robust online and full price sales growth. 

Food has maintained its momentum, outperforming the market over both 12 and 24 months. The market continues to be impacted by the headwinds and tailwinds that we reported in the first half, but I remain encouraged that our transformation plan is now driving improved performance."

ii round-up:

Retailer Marks & Spencer (LSE:MKS) today detailed strong Christmas trading, with management confidence in its full-year profit guidance strengthened.

Total group sales climbed by 8.6% compared to the same period in the financial year 2019/20, before the pandemic. That marginally exceeded analyst estimates. Full-year profit is now guided to “at least £500 million” from "in the region of £500 million” previously. However, the consensus estimate already stood at £515 million, potentially generating some disappointment. 

M&S shares fell by more than 5% in early UK trading, having risen by around 80% over the last year. Shares for fellow home and clothing retailer Next (LSE:NXT) are little changed over that time. Discount retailer B&M European Value Retail (LSE:BME) has risen by around 10%.

UK clothing & home sales at M&S rose by 3.2% compared to the same pre-pandemic quarter. UK food sales on the same basis climbed 12.4%, generating the retailer’s best ever Christmas performance. Both beat analyst forecasts. 

M&S has over 900 UK stores including more than 600 Simply Food outlets. It has more than 450 stores overseas with most operated on a franchised basis.  

International sales improved 5.1% compared to the same pre-pandemic quarter. Online clothing & home sales spiked 50.8% on the same basis. The group aims to achieve well over 40% of clothing sales online over the next three years compared to 34% as of its November interim results.

Full-year results to the 2 April are scheduled for 25 May. 

ii view:

Marks & Spencer is a retailer of clothing, homewares, and food both in store and online. Its food business now includes a 50% joint venture with delivery company Ocado (LSE:OCDO). It also operates both M&S Bank and M&S Energy.

Under its current transformation plan, a more focused core range of clothing & home products has been established. Over 1,300 staff have been trained in efficient buying and merchandising. Product displays have been updated both in store and online. Food promotions have also been substantially reduced and entry price points sharpened. A modernisation of its store estate continues.

For investors, signs of recovery have been seen before and not come to anything. Competitors such as Next and Sainsbury's (LSE:SBRY) are not standing still and working hard. Concerns about rising costs and supply chain challenges persist and the dividend payment remains suspended. 

That said, recovery momentum under this current transformation plan continues. Its joint venture with Ocado has given the food business a strong e-commerce outlet. And the suspension of the dividend has also provided Marks with increased financial flexibility and opportunity to reduce debt. For now, and with signs of recovery proving highly encouraging, long-term fans of this iconic retailer are likely to stay patient.  

Positives: 

  • Reducing High Street stores and growing online
  • Ocado Joint Venture gives it a scalable presence in online grocery

Negatives:

  • Competition in both clothing and food remain fierce
  • No dividend payment

The average rating of stock market analysts:

Buy

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