Marks & Spencer warns things could get worse next year

M&S has done a lot to improve the business, but there are issues at play beyond its control and the shares have halved in value this year. Our head of markets runs through the latest results.

The pace of transformation at Marks & Spencer Group (LSE:MKS) continues to accelerate and is feeding through to some notable progress.

For once, it is not the food business, but the revitalised Clothing & Home unit which is showing the greatest signs of promise. Previously seen as a dowdy and limited shopping experience, M&S has invested heavily in changing perceptions of style, while also adding an increasingly strong online alternative to the offering. Indeed, the M&S app now has four million users and accounts for 32% of overall C&H sales. 

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Despite strong comparatives, C&H sales increased by 14% in the first half, with store sales growing by 18.8% and online by 4.9%. Net margin remained strong at a respectable 9.8%, while adjusted operating profit increased by 33% to £171 million. 

The Food business also continues to make its presence felt, although the decision not to pass on some of the costs which the group is incurring has inevitably impacted the numbers. While Food sales increased by 5.6% in the 26 weeks ended 1 October, adjusted operating profit fell by 42% to £71.8 million, reflecting this “value investment”, general cost pressures and continued investment in technology.

Ocado Retail also swung to a marginal loss of £0.7 million from a previous profit of £28 million, although the joint venture is very much one with the longer term in mind. Continued investment in Customer Fulfilment Centre expansion and a revamp of the customer proposition should move the dial in due course, although in the meantime growth is being seen in customer numbers, which grew by 17%.

Future sales are clearly in mind and the relevance of both brands should bode well in ramping up profit. Marks has high hopes for the venture, which will continue to receive investment in an effort to accelerate payback.

From a group perspective, the transformation continues apace as the company looks to streamline its structure and capitalise on its particular areas of strength. The store rotation project, which aims to replace some of the previously confused layouts with a more dynamic and appealing look, is showing early signs of success in the new stores.

Meanwhile, an overall eye on costs remains in focus, with a projection to save £150 million next year through the likes of a combination of technology-driven efficiency gains and a reduction in structural costs. The 8.5% increase in revenues and 11% spike in pre-tax profit are proof positive of a transformation which is gaining traction.

The balance sheet is also receiving some care and attention, with net debt reducing over the period from £3.2 billion to £2.9 billion, while the generally improving strength gives further flexibility to the company for future investment. This does not yet extend to shareholder returns, where a cautious approach is being adopted, with no decision on the reintroduction of a dividend until nearer the year-end. 

For all of the progress, and even with the traditionally strongest final quarter in play, the outlook for the next year is cloudy for reasons which are largely outside the company’s control.

As the company admits: "Across all M&S markets it is highly likely that conditions will become more challenging in FY24." And it is planning on "a material contraction in market demand."

The festive period and a rarely timed World Cup competition should provide a shorter term boost, while M&S is at pains to point out that a fair proportion of its customers are ones with a higher income and age demographic.

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Even so, the deteriorating economic outlook has ravaged the share prices of retailers in general, and M&S is no exception, with the shares having fallen by 38% over the last 12 months as compared to a decline of 20% for the wider FTSE250. The shares have fallen over 50% in 2022.

Despite an increasingly attractive valuation in historical terms, the tide has not yet turned in the company’s favour, with the market consensus stuck for the moment at a 'hold'.