- Turnaround strategy starting to bear fruit
- Full year profits smash forecasts
- M&S to reinstate dividends at the interim results
British retail bellwether Marks & Spencer’s (MKS) shares surged 11.5% to a one-year high of 182.5p today after the foods-to-fashion seller reported forecast-beating full-year profits, prompting another round of earnings upgrades from analysts.
Besides a much better-than-expected performance from the food business, investors were delighted as Marks & Spencer reported positive progress in its reshaped clothing and home business as well as double-digit growth in international sales.
The FTSE 250 retailer also flagged ‘a good start’ to the new financial year with sales in both the clothing and home and food divisions up year-on-year.
RESULTS HIGHLIGHTS
Despite cost inflation crimping margins, Marks & Spencer generated adjusted pre-tax profits of £482 million for the year ended 1 April 2023. Though down 7.8% year-on-year, the result was comfortably ahead of the £433 million the market was looking for.
Sales rose 9.9% to the best part of £12 billion, with sales in the clothing and home division up 11.5% to £3.72 billion and food sales ticking 8.7% higher to top £7 billion for the first time.
Store sales outperformed online in clothing and home, with Marks & Spencer citing strength in city centre and shopping centre locations, though online sales were also up, buoyed by strong growth in click and collect revenues.
M&S seems to have found the right formula in fashion and is once again becoming a go-to provider of everyday clothing and outfits for special occasions.
Like-for-like food sales fattened up 5.4%, with Marks & Spencer increasing its market share.
A decision not to pass on the full impact of cost inflation has worked wonders, with much of sales growth being driven by volume as prices on many items haven’t gone up as much as at other grocers.
Less impressive were the results from the Ocado Retail joint venture, where sales softened 1.2% to £2.2 billion as home deliveries declined amid the return to ordinary shopping habits after the pandemic.
WHAT DID THE CEO SAY?
‘One year in, our strategy to reshape M&S for growth has driven sustained trading momentum, with both businesses continuing to grow sales and market share,’ said CEO Stuart Machin.
‘Our food and clothing and home businesses invested in value to protect customers from the full force of inflation which, whilst impacting margin, was the right thing to do, as serving our customers well is the only route to delivering for our shareholders.’
Machin added: ‘The store rotation and renewal programme delivered strong sales uplifts and will accelerate this year, including the opening of five brand defining full-line stores in major cities. Our disciplined approach to capital allocation means we can invest for growth, while further reducing net debt and maintaining investment grade credit metrics, and we plan to resume dividend payments at our interim results.’
EXPERT VIEWS
Russ Mould, investment director at AJ Bell, commented: ‘It feels like the longest turnaround in corporate history, but there are finally signs that Marks & Spencer has struck the right formula. Rather than the usual story of strong food sales making up for weakness in clothing, both parts of the business are now doing well.’
However, it’s not all good news: ‘The online joint venture with Ocado is undergoing a “reset” as growth hasn’t matched expectations. It is trying new things, but the jury is out on how fast it can achieve success. The Sparks card remains one of the more confusing membership/loyalty schemes on the market and there is certainly more it can do to strike a better chord with customers.’
Begbies Traynor’s (BEG:AIM) Julie Palmer said that while Marks & Spencer is forecasting only modest growth for the year ahead, ‘there is now no reason why the refocused clothing and homeware proposition and its food business that’s outperforming the market can’t continue to capture market share from the likes of John Lewis.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Martin Gamble) own shares in AJ Bell.
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