M&S and AB Foods feel benefit of Zara sales boom

Retail stocks, still basking in the glow of results from M&S, are in the news again following great numbers from one of the industry’s big hitters.

Shares near £2 and a dividend on the way make this week’s Marks & Spencer Group (LSE:MKS) annual report one that the retailer’s 100,000-plus small shareholders may actually enjoy reading.

That’s rarely been the case in recent years, with chair Archie Norman admitting in the 2023 edition that of all his turnarounds “this has been the slowest and most intractable”.

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He blamed the deep-rooted nature of the problems and culture at the ‘old M&S’, adding that shareholders are at last seeing the reshaping of M&S take hold through new energetic leadership, strong trading results and the prospect of a return to dividends.

Norman, who joined M&S five years ago, called the mission the most important in retail as management returns a “great British brand back to health after years of drift”.

It’s still a work in progress, with shares double their autumn low but short of where they were before the pandemic. The direction of travel is positive though, with last month’s better-than-expected annual results and the pledge to pay a November dividend after an absence of three years followed by a series of City upgrades.

The latest came today when UBS raised its price target from 120p to 200p, adding that a strong end to the 2023 financial year, easing cost headwinds and structural cost savings meant it had lifted profit forecasts by 30% and 26% respectively for the next two years.

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The bank said following the results: “Trading, costs and cash were strong suggesting the transformation efforts are beginning to deliver structural improvements.”

In the clothing and home department, UBS noted that a better buying and merchandising strategy helped the retailer retain a much stronger full price sales mix. “While we expect another year of margin decline given investment in value and FX impact, we see potential for midterm margin recovery.”

In food, the bank’s own research shows the perception of M&S prices versus Tesco at near to a multi-year best. It added that a stronger balance sheet should help in any discussions on the Ocado joint venture as the tie-up’s five-year anniversary approaches.

UBS said a 50% year-to-date improvement meant shares fairly reflected the progress achieved, whereas Deutsche Bank recently raised its price target as far as 235p and Goldman Sachs opted for 220p.

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The shares today rose another 5.65p to 193.25p, part of a strong session for retail stocks after Zara owner Inditex defied expectations of slower growth by reporting sales up 16% in the first month of its second quarter. Other beneficiaries included Primark owner Associated British Foods (LSE:ABF), which led the FTSE 100 index with a rise of 76p to 1,916p.

The outlook for M&S and other retailers continues to be tempered by economic uncertainty, however, with UK interest rates still rising and mortgage holders facing a payment shock as their deals end during this year.

In the meantime, the share price and trading progress should mean a positive backdrop for those logging in for the company’s annual general meeting on Tuesday 4 July.

This will be another digitally enabled meeting, held and broadcast from M&S’s Waterside House Support Centre and hosted by radio and television broadcaster Anita Anand.

Shareholder participation at the 2022 gathering far exceeded levels seen at the last in-person AGM in 2019 as M&S seeks to make it easier to have a say in the company.

It comes as the chain leads a national “Share your Voice” campaign to bring back retail shareholder democracy fit for a digital era. Norman said in this week’s annual report: “If M&S does not stand up for the small shareholder, who will?”