M&S sparkles in half-year results

Marks and Spencer (MKS) blew market forecasts out of the water in its half-year results. Adjusted profit before tax jumped by 75 per cent to £360mn, compared with consensus estimates of just £275mn. The scale of the discrepancy was described as “a little embarrassing for the analytical community” by Peel Hunt and caused shares to surge by 10 per cent in early trading. 

Growth was strong across both the food and clothing divisions, and highlighted M&S’s progress both front of house and behind the scenes.

UK food sales increased by 15 per cent to £3.8bn, with like-for-like sales up by 12 per cent. Despite investing £30mn in price –  it shrunk the price tags of 200 products and locked in the price of 150 more – M&S also managed to grow the division’s adjusted operating margin from 2.2 per cent to 4.3 per cent. This meant adjusted operating profit more than doubled to £165mn. Management attributed this to manufacturing, operational and packaging efficiencies, helped by the 2022 Gist acquisition, as well as growth in volume and market share. 

Meanwhile, clothing and home sales grew by 5.7 per cent to £1.8bn and adjusted operating profit shot up by 30 per cent to £223mn. Profits were boosted by more full-price purchases, cost reduction in the logistics network, and lower than expected freight rates. 

The speed of M&S’s transformation has been truly impressive – particularly in today’s environment. Savings of over £100mn were delivered in the first half and the group is on track to deliver over £150m in the current year. Store rotation is also continuing at pace, with three full line stores opened in the period and six renewed. All are “attracting new customers and performing ahead of plan”.

Much will depend on what happens next year, however. Management warned that the outlook “remains uncertain” for 2024 and said it is “not relying on the favourable recent market conditions persisting”. As such, it believes profit will be weighted towards the first half. 

This has not stopped it reintroducing a “modest” 1p interim dividend after scrapping payouts during Covid. However, it does cast some doubt over its transformation plan. The “Reshaping M&S” strategy doesn’t come cheap, with capital expenditure reaching £190mn in the period. Debt is also high at £2.56bn (including lease liabilities) and the group has yet to restore its investment grade credit rating.

These things matter less when customer demand is high and the group is generating plenty of cash. Should sales falter, however, there could be knock on effects for M&S’s operational and financial transformation. Given the group is trading slightly above its five-year average, on a price/earnings ratio of 10.7, this makes us a little nervous. Hold. 

Last IC view: Hold, 218p, 22 Aug 2023