Marks & Spencer (MKS) is celebrating a strong festive period, in which its food division posted its highest ever Christmas sales. Profit before tax is now expected to reach at least £500m, in line with previous guidance. However, concerns linger about the retailer’s long-term strategy.
According to a trading update, food sales are up 10 per cent on Christmas 2020, and 12.4 per cent higher than Christmas 2019. Management noted larger basket sizes, suggesting customers are turning to M&S for more of their everyday shopping, and said its products are performing strongly on Ocado.com. (M&S represented just under a third of baskets in December).
The beleaguered clothing & home division also showed signs of improvement, with sales up 3.2 per cent on pre-pandemic levels, after plummeting during the first lockdown. Under its transformation plans, the retailer is moving away from intensive promotions and clearance sales, and is instead emphasising its “trusted value trading stance”. The strategy seems to be working. This Christmas, full price sales grew by 45 per cent, and the amount of products sold on promotion fell by two thirds.
Despite the upbeat tone of the update, however, it caused shares to fall by 6 per cent, suggesting that long-term issues remain unaddressed. Growth in M&S’s clothing & home division is still sluggish, for example, with in-store sales down 10.8 per cent on 2019/20. Its legacy store base could still prove burdensome, therefore, given the weakness of city centre and high street trade.
There are also concerns that the division’s profit growth is propped up by cost saving measures and its decision to scale back its clothing range. Panmure Gordon warned that long term issues, such as online profitability and lack of product signature, “have not really been addressed yet”, and questioned the retailer's decision to cut its women's clothing range.
Things are brighter in the food aisle. Retail parks and Simply Food stores continued to outperform last December, and while food price inflation could prove a threat, it could also bolster M&S’s strategy of trading customers up into more premium offers. Hold at 238p.
Last IC view: Hold, 224p, 10 Nov 2021
