- Solid trading at ‘Simply Food’ outlets
- Covid bounce-back to continue in the near term
Shares in Marks & Spencer (MKS) saw a double-digit increase in response to a surprise profit upgrade, which was underpinned by a strong food offering and a post-pandemic shopping boom. However, a struggling clothing and homeware division, combined with the ‘enduring weakness’ of city centre and high street stores, are still hampering the company’s long-term prospects.
M&S reported its first loss last year after a miserable period for its clothing division. But half-year profit before tax has now rebounded, and group revenue is up 5 per cent on pre-Covid levels. Food was the star performer, with retail parks and smaller ‘Simply Food’ outlets doing particularly well. To the consternation of some analysts, the retailer’s product development team is now focusing on ‘mainstream’ products such as pasta, ready meals and wine, as well as seasonal family products and frozen ranges.
Concerns that this could dilute M&S’s high-end brand are largely offset by the retailer’s lucrative partnership with Ocado, however. M&S products already account for 29 per cent of the Ocado basket and Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said M&S has "muscled into a prime spot" of the e-grocery market.
The clothing and homewares segment is proving less on-trend. Despite the retailer’s efforts, sales are 1 per cent lower than in 2019, when performance was already poor. Store sales are in decline and retail parks – which still attract food shoppers – are failing to improve the situation. M&S says its legacy store base meant that the business remained impacted by the "enduring weakness" of city centre and high street trade.
But the retailer is confident that its new operating model can reverse years of decline, citing a broadener choice of products in activewear, kids' daywear and home. It is also moving away from intensive promotions and clearance sales, and product displays are due to become "more inspiring".
M&S has assured investors that it can drive up shareholder value and expects the Covid bounce-back to continue in the near term. As a result, it has upgraded its annual underlying profit guidance again, from £350m to £500m.
It won’t be plain sailing, though. Management has warned that there are growing issues with driver, warehouse and supplier labour shortages, which it has tried to mitigate with recruitment drives. The retailer is also planning for "significant" supply chain cost increases in the second half of the year, with problems expected to persist into next financial year. Dividend payments remain suspended. Hold.
Last IC view: Sell, 167p, 26 May 2021
|MARKS AND SPENCER (MKS)|
|ORD PRICE:||224p||MARKET VALUE:||£4.38bn|
|DIVIDEND YIELD:||na||PE RATIO:||140|
|NET ASSET VALUE:||129p||NET DEBT:||121%|
|26 weeks to 02 Oct||Turnover (£bn)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|