ii view: M&S forecasts a profit recovery

Covid has added costs to its transformation programme but online sales have grown. Buy, sell or hold?

Full-year results to 27 March

• Revenue down 12% to £8.97 billion
• Loss before tax of £201 million down from profit of £67 million
• Net debt down 11% to £3.52 billion 
• No dividend payment

Guidance:

• Expects a full-year profit of between £300 million and £350 million

Chief executive Steve Rowe said:

"In a year like no other we have delivered a resilient trading performance, thanks in no small part to the extraordinary efforts of our colleagues. In addition, by going further and faster in our transformation through the Never the Same Again programme, we moved beyond fixing the basics to forge a reshaped M&S. With the right team in place to accelerate change in the trading businesses and build a trajectory for future growth, we now have a clear line of sight on the path to make M&S special again. The transformation has moved to the next phase."

ii round-up:

Marks & Spencer (LSE:MKS) is a retailer of clothing, homewares, and food both in store and online. 

It operates in the UK and overseas. International operations in Europe and Asia are both owned and franchised businesses.

Its food business now includes a joint venture with delivery company Ocado (LSE:OCDO). The company also operates both M&S Bank and M&S Energy.

For a round-up of these latest results, please click here. 

ii view:

M&S has become a business of contrasting fortunes. Its clothing & home business has struggled to attract the younger, more fashion conscious and keen-to-spend consumer, leaving it reliant on an ageing and slowly dwindling demographic. Its premium food offering, on the other hand, has arguably become a treat for hard-pressed consumers, particularly at celebration times such as Easter and Christmas.

Now and through the added obstacle of a pandemic, M&S is undergoing a further transformation. Change now includes a focus on value offerings, widening the appeal of its products, investing in its online and digital capability including its Ocado partnership and reducing the cost of both its store estate and supply chains. Based on recent strong performances, it is also looking to more than double international online retail sales, adding an online presence in more countries. 

For investors, a 35% increase in online website visits and a 54% hike in sales suggests signs of success in its revamped digital offering, albeit helped by consumers accelerated move online under the pandemic. The popularity of its products at Ocado, outperforming its previous Waitrose partner, bodes well, while guidance for profit of up to £350 million in the current year to March 2022 was ahead of prior analyst forecasts. 

But competitors such as Next (LSE:NXT) and Sainsbury (LSE:SBRY) are not standing still. Operating costs may come under some broader economic pressure while the focus on restoring profitability means that a return to dividend payments is unlikely in the current year. In all, and with the shares sat on an estimated forward price earnings ratio just above the five-year average, the stock for now looks to be up with events. 

Positives: 

• Reducing high street stores and growing online
• Ocado Joint Venture gives it a scalable presence in online grocery

Negatives:

• The battle to revive its clothing sales is ongoing
• No dividend payment

The average rating of stock market analysts:

‘Strong hold’