M&S: does historic loss mark bottom for the share price?

Retailer does its best to fend off pandemic economic blow, but brand transformation may still be needed.

While an historic loss cannot be ignored, Marks & Spencer (LSE:MKS) is working at pace to transform its business and there are some signs of early success.

In these half-year results for the 26 weeks ended 26 September 2020, M&S confirmed the streamlining is likely to result in annualised cost savings of £115 million.

Its online channel is receiving particular attention to modernise the overall offering and the Food business has maintained its position as a positive contributor to the business.

Part of this streamlining is a rotation of the store estate, recognising that the success seen in the likes of retail parks rather than the high street may well be a permanent feature of physical shopping habits, such that the group needs to consider a complete overhaul of its outlets.

Meanwhile, the joint venture with Ocado is already beginning to bear fruit, with growth of 48% in retail revenues during the first half, contributing to a share of profit to M&S of £39 million.

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Capacity is also being ramped up in anticipation of further growth and, while the price M&S paid for its half-share in the joint venture was generally seen as being high, the early signs are promising.

Elsewhere, better-than-expected revenues after the easing of the lockdown and careful financial management have resulted in net debt falling by 5.6% to £3.9 billion, with access to liquidity of £1.4 billion providing a further buffer.

However, while progress is certainly being made, M&S has much ground to recover in lost revenues to competitors, while the pandemic has also left a painful mark on its numbers.

The swing to an historic pre-tax loss of £87.6 million - the first in its 94-year history as a publicly-listed company - compares with a profit of £158.8 million in the corresponding period last year. Group revenues declined by 15.8%, and within this number the drop of 25.5% to International revenues could deteriorate further depending on the outcome of the UK’s Brexit negotiations with the EU.

Long since the thorn in the side of M&S, the Clothing & Home business remains under severe pressure.

A combination of fashion lines being seen as unfashionable especially to younger customers, exacerbated by the lockdown and subsequent impact on the closure of stores resulted in a revenue decline of 40.8% for the half. 

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The reduction in the second quarter of 21.3% was a significant improvement to the first quarter decline of 61.5%, but even in the weeks since the period these results cover, Clothing & Home revenues have fallen once more by 21.5%.

There is little doubt that a reorganisation of the company, and to some extent the brand, is long overdue. Whether the speed of this transformation is too little too late remains to be seen, but M&S is making every effort to stem what has been a slow decline over recent years.

Unsurprisingly the share price has reflected the torrid time which the company has endured, with a decline of 57% in the year to date underlining its parlous position. 

Over the last year, the shares have lost 49%, as compared to a decline of 14% for the wider FTSE 250 index, and a drop of 82% over the last five years is proof positive that changes are essential.

Given the basement price of the shares in comparison to its former strength and with some signs of improvement being displayed, the market consensus of the shares remains defiantly at a ‘buy’.

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