ii view: is this M&S turnaround the real deal?

Results beat forecast and there are signs of improvement at its clothing business. Buy, sell or hold?  

First-half results to 2 October

• Revenue up 24.8% to £5.1 billion
• Pre-tax profit of £187 million, up from H1 loss last year of £87.6 million
• Net debt down 22.6% to £3.15 billion
• No dividend payment

Guidance:

• Now expects full-year pre-tax profit of £500 million, up from a previous £300 million to £350 million

Chief executive Steve Rowe said:

"Given the history of M&S we've been clear that we won't overclaim our progress. Unpacking the numbers isn't a linear exercise and we've called out the Covid bounce back tailwinds, as well as the headwinds from the pandemic, supply chain and Brexit, some of which will continue into next year. But, thanks to the hard work of our colleagues, it is clear that underlying performance is improving, with our main businesses making important gains in market share and customer perception. The hard yards of driving long term change are beginning to be borne out in our performance."

ii round-up:

Marks & Spencer (LSE:MKS) is a retailer of clothing, homewares, and food both in store and online. 

In the UK, it has over 900 stores including more than 600 Simply Food outlets. It also has over 450 stores overseas, with most being operated on a franchised basis.  

The group’s food business now includes a 50% joint venture with delivery company Ocado. It also operates both M&S Bank and M&S Energy.

For a round-up of these latest results, please click here. 

ii view:

Marks & Spencer has been a business of contrasting fortunes for some time, with progress at its food business being countered by a retreating performance at its clothing & home business. Now, and through the added obstacle of a pandemic, M&S is undergoing a further transformation. 

At its clothing & home business, a more focused core range of products has been established. Over 1,300 colleagues have been trained in efficient buying and merchandising. And product displays have been updated both in store and online. Management aims to achieve well over 40% of clothing sales online over the next three years compared to 34% in this latest half. For food, promotions have been substantially reduced and entry price points sharpened. More broadly, a modernisation of its store estate remains ongoing. 

For investors, signs of recovery have been seen before. Competitors such as Next (LSE:NXT) and Sainsbury's (LSE:SBRY) are not standing still. And like businesses generally, concerns for rising costs were flagged And the dividend payment remains suspended. 

More favourably, the brand name is still strong. The gross profit margin for its clothing & home business has improved. Full price clothing & home sales rose 17.3% year-over-year, while the overall results broadly beat analyst forecasts. The joint venture with Ocado has given the food business a strong e-commerce outlet. And the suspension of the dividend has given it greater short-term financial flexibility. For now, while some caution regarding a recovery seems sensible, long-term fans of the retailer are likely to be greatly encouraged. 

Positives: 

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

Negatives:

• The battle to revive its clothing sales is ongoing
• No dividend payment

The average rating of stock market analysts:

Buy