Marks & Spencer shares rocket as results fuel turnaround hopes

Signs that M&S has really turned a corner have got investors excited, and the shares now trade at a two-year high. Our head of markets runs through all the important numbers.

Marks & Spencer (LSE:MKS) was one of many companies where the pandemic forced accelerated change, and the results are beginning to bear fruit.

Indeed, the figure which reflects the improvement most sharply and shows a company at full throttle is another upgrade to full-year guidance. The company had previously estimated full-year pre-tax profit to be in the range of £300 to £350 million, but now expects the number to be £500 million. This significant adjustment follows a stronger first half performance which has spilled over into the second half of the year to date.

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As ever, Food sales are the crux of the improvement in fortunes. Overall sales for the 26 weeks ended 2 October were 10.4% ahead of pre-pandemic levels in 2019, with an inevitable shift being seen whereby City Centre sales have declined by 18.4%, but Retail Parks have increased by 23.3%. At the same time, the core offerings such as frozen and grocery/household have shown strong growth, with the beleaguered lines such as hospitality and “food-on-the-move” slowly recovering from some of the pandemic woes.

In addition, the joint venture with Ocado Group (LSE:OCDO) is also contributing to the overall picture, with an increase of 19% in orders compared to the previous year and with ongoing investment and capacity likely to add to the strength of the offering. A slight dip in revenues came against strong comparatives and the harmful temporary effect of the Erith CFC fire.

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Perhaps most noticeable is that the slumbering giant which was the Clothing & Home business is showing signs of renewed life. Full-price sales increased by 17.3% compared to pre-pandemic and the company is anticipating improved perception.

Previously seen as tired and dowdy, the general offering has been reinvigorated and the signs to date are promising. There has been online sales growth of 60.8%, and this channel now represents 34% of total Clothing & Home sales. The operating profit of £156 million compares with £110 million pre-pandemic and the progress of this unit will receive close investor scrutiny for further growth over the medium term.

The overall boost in performance has enabled net debt to be reduced by 22.6% compared to 2019, and pre-tax profit of £187 million versus a loss of £88 million last year and a profit of £159 million in 2019.

Even so, notwithstanding the raised guidance the group is well aware of the pressures it faces across the business, ranging from driver and general labour shortages in the supply chain to disruptions following Brexit at some borders. There are also cost impacts from a rising inflationary environment meaning that overall there will be sharper cost pressures to come for the rest of this trading year and into the next. This immediate challenge will keep the pace of change at M&S alive, as it looks to mitigate those pressures through productivity plans, further store rotation and continued investment in technology.

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Prior to today’s major share price spike on the latest uplift, the previous profit upgrade following a potential inflection point in the company’s development  propelled the share price higher by 73% over the last year, which compares to a rise of 23% for the wider FTSE250.

The shares remain down by 38% over the last three years however, which is a sobering thought to consider for investors and the M&S team alike. Nonetheless, the current direction of travel is far more positive than has been the case for some time, with the market consensus of the shares as a buy reflecting that, in investment terms, there may still be plenty to go for.