Interactive Investor

ii view: M&S shares surge higher as profit hopes are raised

Pushing a store revamp programme and planning a restart of the dividend payment. Buy, sell, or hold?

15th August 2023 12:29

by Keith Bowman from interactive investor

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Trading update for first 19 weeks of the financial year to 12 August

  • Like-for-like Food sales up over 11%
  • Like-for-like Clothing & Home sales up over 6%

Guidance:

  • Now expects full-year profit growth
  • Now expects interim results to show significant improvement against its previous forecasts
  • Invest with ii: How to Buy SharesFree Regular Investing | Super 60 Investment Ideas

ii round-up:

Clothing and food retailing icon Marks & Spencer Group (LSE:MKS) today upped its profit hopes given strong year-to-date trading and good progress for its reshape or transformation programme. 

In an unscheduled update, management now expects year-over-year profit growth with first-half results to the end of September expected to show a significant improvement compared to its previous forecasts. 

Shares for the FTSE 250 retailer rose by more than 7% in UK trading having already gained by 66% year-to-date coming into this latest news. Shares for its food delivery partner Ocado Group (LSE:OCDO) are up by around 29% during 2023, while shares for clothing and homewares rival Next (LSE:NXT) are up by 20%. The FTSE 250 index itself is down around 1% year-to-date. 

Like-for-like clothing and homeware sales at M&S have grown by more than 6% year-to-date. Food sales on the same basis and excluding those via partner Ocado are up by more than 11%. 

Management flagged continued market share growth across both its categories with its profit margin remaining robust and driven by a strong store performance and aided by its store rotation and renewal programme.

Broker Morgan Stanley raised its full-year 2023-2024 profit forecast by 10% to £555 million following the news, upping its estimated fair value share price target to 244p from a previous 230p per share. 

First-half results to the 30 September are scheduled for 8 November.

ii view:

Marks & Spencer is a retailer of Clothing, Homewares and Food, both in store and online in the UK and overseas. Its UK food business now includes a 50% joint venture with delivery company Ocado. Group rivals take in Next, owner of Zara, Inditex, online retailers such as ASOS (LSE:ASC) and rival food retailers such as Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY)

For investors, management’s flagging of economic outlook uncertainties in this latest update should not be ignored. Initiatives to attract younger buyers to its clothing and enhance the customer perception of value across its food lines remains a work in progress. Costs generally for businesses are elevated, while group cash is still being directed to both ongoing required investments and reducing debt.   

On the upside, progress for sales and profits is being made. Structural cost savings of £400 million over five years are being targeted; management initiatives including its store revamp and the selling of third-party brands are ongoing, while a sufficient reduction in debt was previously made for management to now be planning a modest restart of the dividend payment later this year.   

On balance, and while some caution looks sensible, trading momentum looks to remain in its favour with longer-term investors likely staying patient. 

Positives: 

  • Product and geographical diversity
  • Ocado Joint Venture gives it a scalable presence in online grocery

Negatives:

  • Competition not standing still
  • Uncertain economic outlook

The average rating of stock market analysts:

Strong hold

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