M&S predicts return to profit growth

Marks & Spencer Group will be glad to see the end of a year where cyber disruption was the unfortunate highlight. Even so, the group’s healthy financial position helped it weather the storm, and indeed M&S continued to make investments in the business despite cyber costs elsewhere.

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The threat to the business was never existential, but nonetheless had a significant impact on sales. It remains to be seen how much of the business lost during the disruption will be recovered, not least in a Fashion, Home and Beauty unit which accounts for 22% of group revenues. The online outage has left a mark on the group’s reputation as well as inflicting some material damage. Adjusting items for the period of £292.1 million included £131.3 million related solely to the attack, although an insurance claim recouped £100 million.

That being said, there is little doubting the ongoing resilience and strength of the Food business, which accounts for 56% of group revenues. Sales increased by 7% to £9.7 billion over the year, reaching a new milestone market share for the group along the way, and where innovation and quality upgrades continue to propel performance. Even so, wastage and loss during the disruption due to manual rather than automated stock allocation was a contributing factor to an adjusted operating profit which fell by 9.6% to £444.5 million.

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However, prospects remain bright for the unit, which is a clear focus of the group’s push for growth in terms of new stores and general investment. Indeed, quite apart from the enduring appeal of its specialist food ranges, the nature of these revamped stores has led to a noticeable increase in customers choosing M&S for their full shop, while the impending festive season is one where M&S traditionally prevails. The group now plans to have 380 food stores by 2027/2028.

Fashion, Home & Beauty was the most affected by the outage. Sales declined by 7.7% overall to £3.9 billion, including declines in store due to the lack of the Click & Collect option and, of course, online.

Adjusted operating profit of £213.4 million was 55% lower than the previous year and stopped most of the unit’s recent progress in its tracks. The digital part of the business is still in recovery mode, while reduced high street footfall was a headwind.

More positively, the group noted that its new season sales were showing some strong signs of resonating with shoppers, playing into its new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image, including but not limited to both women’s and men’s categories.

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Ocado Retail remains a work in progress with increasing signs of improvement. Revenues of £3.2 billion and an adjusted operating profit of £15.2 million marked an inflection point, and at 18% of group revenues the unit has an important part to play, even if reaching this stage has taken longer than had been initially hoped. International sales, which account for just 3% of group revenues, fell by 7.2% although adjusted operating profit rose by 8.9% to £39.1 million.

At the group level, revenues of £17.37 billion were 25% higher than the corresponding period, although this is largely cosmetic given the inclusion of Ocado Retail for the first time. More tellingly, perhaps, adjusted pre-tax profit of £671.4 million was 23.8% lower than the previous year, although ahead of the £640 million which had been estimated.

Other key metrics were also affected by the outage, such as a Return on Capital Employed which fell to 12.7% from 16.4%, free cash flow of £131.3 million down from £443.3 million and net debt which increased to £2.42 billion from £1.78 billion.

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The outlook is cautiously optimistic as the group continues to recover momentum after a stronger second half, although M&S noted that the coming year will likely see increased fuel, freight and input costs. Even so, cost savings and rationalisation should mitigate most of these headwinds and a resumption of profit growth is anticipated.

Given the debilitating impact of the cyber outage, the shares have inevitably struggled, losing 9.5% over the last year as compared to a gain of 17.7% for the wider FTSE100. Viewed through a longer-term prism, however, the direction of travel remains clear. The shares have gained 102% over the last three years and the group expects to be back on track imminently. As such, the market consensus of the shares as a buy reflects confidence that M&S can now resume its quest in search of former glories.