Shares in Marks & Spencer (MKS) surged 15% higher to 224p after the retail bellwether swung into profit for the first half as demand recovered following the easing of Covid-19 lockdowns.
The high street stalwart also delivered a massive full year earnings upgrade amid improving performances across its food and clothing and home businesses, with investors welcoming news of significantly improved free cash flow and a further reduction in net debt.
The rally is encouraging for Shares, as we added Marks & Spencer to our list of Great Ideas selections here in September in the belief the retailer could be in the foothills of an earnings upgrades cycle.
ANOTHER UPGRADE
Pre-tax profit for the half ended 2 October 2021 amounted to £187.3 million, versus a prior year loss of £87.6 million and above the £158.8 million profit delivered in the pre-pandemic period two years ago.
Adjusted pre-tax profit came in a £269.4 million, almost 53% higher than the £176.3 million generated in the pre-pandemic comparative period.
Food sales were strong, aided by store reopenings for the full period, while the clothing and home business delivered 17.3% growth in full price sales with online turnover up by 60.8% versus 2019/20. Current trading is sustaining the momentum seen in the second quarter, which augurs well with Christmas just around the corner.
And while Marks & Spencer warned cost pressures will become ‘progressively steeper’, assuming there is no further pandemic-related disruption, its central case is for this year’s adjusted pre-tax profit for the year to come in ‘ahead of expectations and in the region of £500 million’.
AJ Bell investment director Russ Mould said: ‘Something spectacular must have happened since August for Marks & Spencer to upgrade earnings guidance once again.
‘Back then, it believed pre-tax profit for the year would be above the upper end of a previously guided £300 million to £350 million range. Now it’s talking about profit hitting £500 million which is quite some jump.’
TURNAROUND HAS TRACTION
‘Given the history of M&S we’ve been clear that we won’t overclaim our progress,’ said CEO Steve Rowe.
‘Unpacking the numbers isn’t a linear exercise and we’ve called out the Covid bounce back tailwinds, as well as the headwinds from the pandemic, supply chain and Brexit, some of which will continue into next year. But, thanks to the hard work of our colleagues, it is clear that underlying performance is improving, with our main businesses making important gains in market share and customer perception.’
VIEW FROM THE EXPERTS
House broker Shore Capital commented: ‘M&S has clearly had an excellent H1 FY22 set against its experiences in the prior year period and more. More importantly though, the business is quite simply in much better shape to face into the future.
‘The backdrop continues to pose multiple challenges, some of which will hold back earnings recovery. However, we feel that we are entering a period when the group is more in control of its own destiny and, as such, has the best chance for some years to deliver our much-vaunted aspiration of sequential ongoing earnings growth, which in time will lead to a similar trajectory around dividends too.’
AJ Bell’s Mould added: ‘Food sales are doing incredibly well, particularly instore. It has really nailed the proposition with decent quality products and an ever-widening range of items.
‘Its online joint venture with Ocado (OCDO) has also helped the business reach a broader audience, such as individuals who want higher quality products but don’t want the faff of visiting a store.
‘Clothing continues to be a mixed bag, but the company comes across as more confident about its prospects. Overall sales aren’t growing but operating profit is, thanks to selling more items at full price.
‘Just imagine if Marks & Spencer and Next (NXT) merged. The former has nailed the food proposition and the latter is an expert in clothing. Together they could be a real force in the retail sector. But such a tie-up seems unlikely as Next doesn’t need any help and it is full of bright ideas to keep growing profits, food certainly not being on the menu.’
