Marks & Spencer annual results: much to like, but much to do

The former high street favourite has made great strides in turning the business around, but it has a warning for shareholders in these results and there's still no dividend.

There is much to like about these full-year numbers from Marks & Spencer Group (LSE:MKS), but there is also much to do before the company can regain its previous status and profit levels.

The company has unquestionably made great strides over recent years in an overhaul of the business which was forcefully accelerated due to the pandemic. The store format was, by the company’s own admission, behind the times and the Clothing unit in particular was not even crossing the mind of new shoppers.

More recently both have received some of the care and attention which had been missing. There has been a revamp of stores into a new format, coupled with store closures in lesser performing areas, reflecting the new requirement for retailers to provide a multi-channel offering.

At the same time, Clothing and Home has of late shown some promising signs of progress. In this 12-month period to 2 April 2022, the unit enjoyed full-price sales growth of 28.5% and a revenue increase of 52%. This was underpinned by an online offering which is now making a significant contribution and accounts for around a third of sales. The online channel saw growth of 56% and the momentum of the last few quarters is vindication of this change to strategy.

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The Food part of the business has for some time been the shining light of the brand as a whole and growth of over 10% suggests that the party is far from over. Careful product management and a range of goods designed to cater for most tastes across a range of prices, has continued the appeal of the offering, particularly during festive periods.

The joint venture with Ocado Group (LSE:OCDO) is helping to strengthen the overall offering, although, given the initial outlay and on current projections, it will be some considerable time before the JV can begin to wash its face.

Even so, in the meantime, capacity is being ramped up, with future sales in mind and the relevance of both brands should bode well in ramping up profit. Marks has high hopes for the venture, which will continue to receive investment in an effort to accelerate payback.

Net profit overall increased to £523 million against a guided level of £500 million at the half-year results, and is comfortably in excess of both the previous year and the period leading up to the pandemic. Stronger cash generation has enabled a further reduction of £1 billion to net debt, which now stands at £420 million, thus affording M&S some leeway in its more pressing expansion plans in the nearer term. More disappointingly, the group will not consider the reintroduction of a dividend until the end of the current financial year.

For all the progress, the share price has been held back by any number of factors and, given the outlook comments, this could continue to be the case. Quite apart from the effects of declining real incomes as inflation persists, M&S has highlighted some headwinds which will result in a lower profit base for the current year.

These include further investment in Ocado retail capacity, the lack of any income from Russia following its withdrawal and the absence of any business rates relief. This is despite a strong first six weeks of the new financial year which has seen further growth in both the Food and Clothing and Home units.

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The shares have risen by 55% since pandemic lows, but stepping back from this rebound the picture is less positive. The shares remain down by 46% over the last three years and have fallen by 16% over the last year, which compares to a decline of 11.5% for the wider FTSE250.

Market consensus for the shares remains cautious, with the general view of the shares as a "hold" leaving the jury out as the company continues its attempts to revitalise its fortunes.