Marks and Spencer boosted by clothing performance

The outlook for retail spending isn’t a pretty one, with consumer confidence at record lows and retailers putting out the most profit warnings on the London market in the third quarter of this year. Marks and Spencer (MKS) pointed to its middle-class customer base in these results as a cause for relative optimism despite planning for cratering demand.

The food and clothing retailer said that “a high proportion of [customers] are in above average paid jobs or retired”. "Many retain a savings cushion affording some resilience to the headwinds,” it added.

That dynamic, along with robust current trading which is in line with forecasts, helped support Marks’ maintenance of its full-year adjusted pre-tax profit guidance. Deutsche Bank analysts said this “should allay some of the bears”, though given the shares fell by 4 per cent after the results release it would seem the market is not in a forgiving mood. The company’s warning that 2024 would be more of a challenge hasn’t fallen on deaf ears, though a targeted £150mn of cost savings should help with profitability.  

In short, these results are cautiously encouraging. Clothing and homeware performance drove the profit uplift in the half, with sales growth of 14 per cent and a net margin of 9.8 per cent a solid result, given headwinds. The division took 50 basis points of market share, and 4 per cent sales growth in the first month of the second half shouldn’t be sniffed at.

This countered a more difficult period for the food side of the business, though its sales were still up by 6 per cent. But its gross margin contracted by 110 basis points as cost inflation bit, and sales at the joint venture with Ocado (OCDO) fell by 4 per cent.

Numis analysts said that “this is a good set of results and encouraging current trading, for a share that is unloved and undervalued”.

The valuation certainly looks attractive. According to FactSet, Marks’ shares trade at a consensus 8 times forward earnings, below the five-year average of 11 times. This looks undemanding when set against peers such as J Sainsbury (SBRY) and Tesco (TSCO), which are both on 11 times, albeit there are other dynamics at play with such competitors. On the downside, a decision on the return of a dividend has been deferred, though this seems sensible given market conditions. Hold.

Last IC view: Hold, 133p, 25 May 2022