M&S chased higher despite sales slump

Out of the blue-chip index after a long slump, our head of markets explains what's behind this rally. 

As Marks & Spencer (LSE:MKS) settles into life in the FTSE 250 index following relegation from the FTSE 100 in September, it is attempting an ambitious turnaround at pace.

Store closures and £75 million of cost savings in its first half are helping the financials, but from a strategic perspective the most pressing challenge is to reinvent the Clothing and Home division so as to be relevant to the modern consumer. 

For some considerable time, the company has been split between a Food business, which has continued to deliver, and a General Merchandising arm whose performance has been plodding and dowdy. This update shows some determination to put things right, from the design of lines through to the supply chain, but the company is playing catch-up with a fiercely competitive and evolving sector. 

Source: TradingView Past performance is not a guide to future performance

The 5.5% like-for-like sales decline in sales is a stark reminder of the challenges ahead. M&S has reported that October was a positive month, but one swallow does not a summer make, and this trend will need to be established as the norm before winning over investors.

The Food part of the business remains in positive territory, adding 0.9% in sales on a like-for-like basis, and the Ocado (LSE:OCDO) tie-up – regardless of any questions around the punchy cost of the deal – will surely provide a boost to the offering, as well as increasing cross-selling opportunities. 

The overall pre-tax profit figure – up 51.5% to £153.5 million - was flattered by £23 million of adjusting items relating to store closures and a technology restructure but is, nonetheless, ahead of expectations. Excluding adjusting items, profit fell 17% to £176.5 million.

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Meanwhile, one result of the share price decline has been a boost to the dividend yield which, despite the previously announced cut, currently stands at over 7% and is adequately covered. The "digital first" strategy which the company is pursuing, aiming to deliver a third of sales online, has had a stuttering start but will inevitably take time to hone, as well as getting into the public consciousness. Elsewhere, there are welcome developments financially in terms of another reduction to net debt.

The sharp focus which the group is displaying in attempting to haul the M&S brand to the current day has initially been well received by the market, although there is much damage to repair. The shares have fallen 36% over the last year, as compared to a near 7% gain for the wider FTSE 250 index, and 32% in the last six months alone. 

The company has at least moved from "on your Marks" to "Get set", but the next stage remains some way off in restoring the brand to its former glories. As such, the market consensus of the shares as a ‘sell’ is likely to remain in place for the time being.