M&S punished for sales drop, but turnaround on track

Lower half-year sales is not ideal, but was largely expected. Crucial here is action taken to keep the turnaround on track, argues Lee Wild, head of equity strategy at interactive investor.

The Marks & Spencer PR machine is in full swing and chief executive Steve Rowe is telling investors exactly what they want to hear. The company has been in desperate need of a major overhaul for years and, under a new and more dynamic leadership team, is getting just that.

M&S is admitting its shortcomings and promising to deliver what investors have been screaming at it to do for years. Modernising the clothing range, focusing on good quality but affordable 'must-haves', and selling more of what people want is reassuring to hear. So is an acknowledgement that the embedded M&S culture is "siloed, slow, and hierarchical", and that M&S is becoming a "faster, more commercial and more digital business".

Talk is cheap, of course, but these half-year numbers stack up too. Shutting underperforming stores is affecting revenue and costs money, but strip that out and pre-tax profit actually grew 2% to £223.5 million. Add back these costs and profit was up 7% to £126.7 million.

Many of the key numbers were in line with expectations. Clothing & Home sales were down 1.1%, food down 2.9% on the same basis, food margin down a little less than forecast at 25 basis points and the dividend was kept at 6.8p, underpinned by growth in free cash flow.

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

Food and clothing sales are still falling, but the masterplan is in its very early stages. This is about getting the basics right. Do that, and everything else is at least built on solid foundations. 

It is crucial that Marks gets this right. Consumer spending is constrained, competition is fierce, and M&S has an inferior online presence. However, the market likes what it sees and is backing management to make this transformation work. 

There's been enough optimism around M&S shares recently to force a break above an 18-month downtrend and, while the FTSE 100 has been flat the past fortnight, M&S is up over 7%. 

Even now, the shares trade on a modest forward price/earnings ratio of 11.5 and offer a prospective dividend yield of over 6%.

Clearly, the market doesn't like the look of lower first-half sales at both divisions, and further gains will hinge on Marks successfully tackling that decline and providing further evidence it is delivering on its promises.