Interactive Investor

M&S reveals new poster child behind fresh share price surge 

24th May 2023 08:42

by Richard Hunter from interactive investor

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There have been many failed attempts to revive the glory years, but the share price has soared today and sits at a 15-month high. Our head of markets explains what's going on. 

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Marks & Spencer Group (LSE:MKS) continues with its transformation apace, boosted not only by its traditionally strong Food business but also by strengthening signs of a revitalised Clothing & Home unit.

Indeed, Clothing & Home is fast becoming the poster child for the new-look M&S. The lines and the look of the offering are 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.

In terms of pre-adjusted profit for 52 weeks ended 1 April , C&H is now the main contributor to profits at 52%, overtaking Food which provided 40%. The improved metric comes at a time when, across the group, M&S sacrificed some of its margins in order to invest in value, and not pass on all of its inflationary costs to customers.

Sales within C&H increased by 11.5% in the year to £3.72 billion, achieved through store sales growth of 14.9% and online growth of 4.8%, underneath which there was a jump of 20% in Click & Collect revenues. Quite apart from the scope of the leisurewear which is now finding favour, such as women’s denim and “smart separates” for men designed at reflecting the new requirements for workwear, the group is also refreshing its stores as part of an omni-channel offering. The store rotation programme is being accelerated, with the new shops providing a more modern and less cluttered experience.

Food continues to be a reliable partner, with sales growth over the period rising by 8.7% to £7.22 billion. Again, some margin was sacrificed to keep a lid on prices for parts of the year, although the typical demographic at M&S is one of higher age and income, which also contributes to sales growth despite a weakening economic backdrop. The International business is also receiving some attention, resulting in sales growth of 11.2% to £1.06 billion which remains a useful if smaller contribution to overall profit progress.

Inevitably there are some chinks in the armour, such as the current contribution of the Ocado Retail joint venture, where the group reported a share of loss of £29.5 million, as compared to a share of profit of £13.9 million the year previous. While customer numbers grew, the frequency of shopping declined in what M&S describes as pandemic normalisation, with sales falling by 1.2%. Nonetheless, M&S retains high hopes for the JV over the longer term, and is currently looking at ways to streamline the business and to drive more sales towards what is currently underused capacity.

Overall, the picture is positive, with pre-tax profits having risen to £475.7 million from £391.7 million in the corresponding period, and ahead of expectations of £430 million. Revenue growth of 9.6% to £11.9 billion was a major feature, while a cost savings programme designed to deliver £400 million over the next five years should provide £150 million in the current trading year.

The modernisation of the supply chain mechanism is already showing signs of positive impact following the acquisition of Gist, with longer term ambitions for further streamlining of the group.

The outlook is also cautiously positive despite the parlous economic backdrop, and the general strength of both trading and the balance sheet has led to the announcement that the group intends to reintroduce a dividend, starting at the half-year numbers in November. While the initial dividend is likely to signal just a moderate return, it represents something of a return to form as well as being a signal of confidence from management in immediate prospects.

The transformation at M&S and the resurgence of the Clothing & Home unit in particular has met with investor approval, with the share price having risen by 20% over the last year and 39% in 2023 so far, as compared to a drop of 3.2% and 1% respectively for the wider FTSE250.

In terms of market consensus, the group has been in the doldrums during the rocky times of recent years, but the continuing turnaround could prompt upgrades to the current general view of the shares as a 'hold', as evidenced by the initial price reaction to the results.

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