Latest profit boost extends M&S share price rally

These half-year results clearly demonstrate why Marks & Spencer Group (LSE:MKS) is so strongly back in fashion with customers and investors alike.

Adjusted operating profit of £462.7 million represented an increase of 12.7% and led to an adjusted pre-tax profit of £407.8 million, itself ahead by 17.2%. Group revenues grew by 5.8% to £6.52 billion in the 26 weeks to 28 September, while there was a notable uptick in the adjusted return on capital employed from 13.2% to 15%.

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Perhaps the most striking element of the group’s transformation is in the Clothing & Home unit, which currently accounts for 31% of group sales and now over half of group adjusted operating profit, where a number of £242.2 million represented an increase from the previous year. Sales grew by 4.7%, underpinned by a healthy margin of 12%.

Its offering is clearly appealing to the new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image. Indeed, M&S reports that “style perception continued to improve” over the latest quarter, with womenswear being a standout performer.

The Food business has also cemented its position as a core contributor to the business as a whole. Sales grew by 8.1% over the period, led by its innovative and popular ranges, and with the unit accounting for 64% of group sales. Adjusted operating profit of £213.1 million marked an increase of 34.5% from the corresponding period, with the margin holding firm at 5.1%. As an aside to the specialist ranges which the company provides, such is the nature of the revamped stores that there has also been a noticeable increase in customers choosing M&S for their full shop.

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Despite this success, Marks & Spencer has no intention of resting on its laurels and has articulated an ambitious next leg of growth.

Store rotation as well as new sites are becoming an increasingly important part of the strategy, particularly with regard to Food stores. Alongside this, the group is planning more investment into smaller ranges such as Home and Beauty, is targeting an improvement to its online offering, as well as a reset to its International business, which was the only blot on the copybook this time around, with sales which fell by 10.3% in the period and where an adjusted operating profit of £15.2 million marked a 53% decline. Even so, International sales account for just 5% of the group total, so not only is the impact limited, but there is also much scope for a turnaround.

There are also some promising signs in the Ocado retail joint venture, where the M&S share of loss came in at £16 million, as compared to £23.4 million the previous year. The improvement was driven by a strong increase of 13.8% in revenues to £1.3 billion, implying that the JV could be nearing a positive inflection point, even though reaching this stage will have taken longer than had been initially hoped.

Elsewhere, there is evidence of increasing success in managing the balance sheet, with net debt reducing from £2.56 billion to £2.16 billion and with a further £60 million of cost savings in the period contributing towards the target of £500 million by 2028.

The dividend was also maintained, and while the yield and the payment remain nominal, the more recent reintroduction of the payment was certainly a statement of both management confidence in prospects while also reflecting the improving health of the entire business.

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In terms of outlook, the group’s comments are particularly buoyant for the upcoming festive season, where both its Food and Clothing & Home businesses could be in line for a further injection of broad customer interest. In the meantime, the warm reaction to the numbers represents a round of applause and adds to a share price performance which of late has been little short of meteoric.

While the heady heights of £7 per share in 2007 remain some way off, over the last two years the share price has risen by 240%. In the last year alone, a spike of 72% compares with a rise of 10.2% for the wider FTSE100 and, even at these levels, there is no sign of the valuation becoming stretched.

Indeed, M&S has convinced investors not only of its reformation so far but also of the prospects for the next stages of growth, with the market consensus of the shares as a strong buy reflecting hope all round that this success story can continue.