M&S can bounce back from £300m cyber hit

Marks & Spencer Group (LSE:MKS)’s recently pristine record has been dented by the well-reported and most unwelcome cyber incident, but the group is nonetheless still making significant progress.

It seems that the group is edging closer to being able to draw a line under the cyber attack, but not before some material damage has been suffered. M&S expects a £300 million hit on operating profit, although the number will be offset by cost mitigation, extra trading actions and perhaps most importantly, insurance payouts.

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Of course, increasingly complex and interconnected IT systems come with a number of entry points, such as links with suppliers and other third parties. This increases the risk that malicious attacks may get through and, indeed, on any given day these attempts are being made even though many result in failure. Even so, the group is hopeful that the new version of its security will be a far higher mountain to climb for malicious hackers.

The incident may well prove to be a “bump in the road” as the company describes it in the fullness of time, and for the moment the incident has not derailed the group’s progress. Revenues of £13.82 billion for the 52 weeks ended 29 March represented an increase of 6% and was ahead of the expected £13.77 billion, while pre-tax profit of £875.5 million breezed past estimates of £840 million and was 22% higher than the corresponding period.

Less positively, the position at Ocado Retail is still a work in progress. A non-cash impairment of £248.5 million resulted in the reported pre-tax profit for the group as a whole dropping by 24% to £512 million, while the conversion of revenue into profit is one which the group continues to regard as disappointing.

Sales of £2.8 billion was an increase of 15.5% over the previous year, while the share of loss was £28.7 million versus a prior £37.3 million, but this conversion is in need of repair and the focus on technology and general efficiencies will continue apace. The progress thus far could imply that the joint venture is near to a positive inflection point, even though reaching this stage has taken longer than had been initially hoped.

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Elsewhere, M&S continues to display its credentials on what has been a hugely successful turnaround story. There is evidence of increasing success in managing the balance sheet, with net debt reducing from £2.17 billion to £1.79 billion and with a further £120 million of cost savings in the period contributing towards the target of £500 million by 2028.

The dividend was also increased, and while the yield moves to a projected and nominal 1%, the more recent reintroduction of the payment was certainly a statement of both management confidence in prospects while also reflecting the improving health of the entire business.

The twin pillars of the revitalised group are the Food business and Fashion, Home & Beauty. The Food unit has long been the jewel in the group’s crown and shows little sign of losing its lustre. Accounting for 65% of overall revenues, sales increased by a further 8.7% over the period to £9 billion, with a 24% boost in adjusted operating profit to £484.1 million. Quite apart from the enduring appeal of its specialist food ranges, the nature of the revamped stores has led to a noticeable increase in customers choosing M&S for their full shop.

Fashion, Home & Beauty is also having its day in the sun after some years in the wilderness. The unit is responsible for 30% of overall sales, and saw revenues increase to £4.2 billion over the year, up by 3.5%, with adjusted operating profit outstripping Food at £475.3 million, a hike of 8.6% which underpins the new direction. Indeed, its offering is clearly appealing to the new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image. M&S continues to relay that style perception is on an upward path, including but not limited to both women’s and men’s categories. 

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There could be some tough times ahead for an increasingly pressured consumer, and the cyber attack was both an unwelcome distraction and a costly repair. Even so, M&S is strongly back in fashion with investors and customers alike and further significant investment into store rotation, supply chain management and technology in general should maintain the momentum.

The cyber glitch has wiped some 11% from the share price over the last month, but this has done little to hamper progress over the last year, where the shares remain up by 33% compared to a gain of 4.3% for the wider FTSE100 index, let alone the 128% spike over the last two years.

Despite some lingering disappointment that the online business is yet to be fully restored, which has weighed on the share price at the market open Wednesday, the direction of travel is clear. The market consensus of the shares as a buy reflects the fact that investors feel that M&S has plenty more fuel in the tank for further progress.