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M&S not in recovery mode – yet

Continued deterioration in M&S food sales is making a full-blown recovery for the high street retailer even harder
November 7, 2018

Marks and Spencer's (MKS) shares fell on the release of these half-year figures, despite slightly exceeding adjusted pre-tax profit forecasts. Consensus estimates expected to see £208m at the half-way stage, but M&S managed to add another £16m to this figure thanks to a timely drop in marketing costs. Full-year guidance from the retailer remains unchanged for now, but some City analysts – including house broker Shore Capital – are less convinced. Following a 2.9 per cent fall in like-for-like food sales – which was below expectations – and a 1.1 per cent decline in clothing and home revenues, analysts have trimmed FY2019 profit forecasts by 3 per cent. The broker now expects pre-tax profits of £528m for the year ending March 2019, giving earnings per share (EPS) of 25.1p, down from £581m and 27.8p in FY2018.

IC TIP: Hold at 239.5p

The predictably sluggish top-line performance was largely the result of the widespread store closure programme, which will eventually see M&S close 100 of its outlets. Closures aside, both the group and analysts admit there’s more work to do to improve underlying growth. While Shore Capital hailed “good cost control” in the first half – indeed, UK operating costs fell by 2.1 per cent in total during the period – the broker says M&S must adapt its culture “through its customer proposition, its supply chain, store estate and online channel”. True, the online performance fared much better, growing ahead of the wider market: M&S.com reported a solid 5.6 per cent increase in sales – despite the closure of the Chinese website – with a 9.1 per cent rise in online clothing and home sales.

Overall, management still expects to see a 4 per cent decrease in the amount of space given over to clothing and home products by the end of the financial year, while food space is expected to stay the same. Gross margins for food are likely to contract, perhaps by as much as 50 basis points, while clothing and home margins are expected to firm. Annual UK operating costs should be flat, but the group is still targeting savings of £350m by 2020-21.

MARKS & SPENCER (MKS)  
ORD PRICE:293.5pMARKET VALUE:£4.77bn
TOUCH:293.3-293.6p12-MONTH HIGH:344pLOW: 262p
DIVIDEND YIELD:6.4%PE RATIO:na
NET ASSET VALUE:178pNET DEBT:62%
Half-year to 29 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20175.131185.26.80
20184.971275.46.80
% change-3+7+4-
Ex-div:15 Nov   
Payment:11 Jan