Why M&S shares just hit a 15-month high

The pandemic forced changes on M&S, but there has been progress and the food business is doing well.

One irony of a crippling pandemic has been to force change where it was needed at straggling companies, and Marks & Spencer (LSE:MKS) is a perfect example.

The period of these annual results bears the full brunt of the various lockdowns and, with M&S assuming in their base case that there will be no repeats, the numbers should represent the nadir of their fortunes.

Overall revenues were marginally higher than expected in the 53 weeks ended 3 April 2021, with the typical pattern repeating of higher food sales and a sharply declining contribution from the Clothing & Home business.

M&S attempted to offset the missed income of closed stores by ramping up its online capability and, while this met with some success and a 54% increase in online sales, it was not enough to stem a 56% decline in store sales. Apart from standing idle, there were additional complications arising from the product mix, where lines such as office attire fell off a cliff and where M&S was also left with the challenge of trying to clear excess stock.

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The company now anticipates a release of pent-up demand as customers replenish their wardrobes, followed by a period of less formalwear post-pandemic. As such, it will be concentrating its efforts on lines such as smart wear, kids casuals and athleisure wear, all of which will be delivered largely through its new online first strategy.

This in turn means that the rotation of the store estate will move into full swing. Lesser performing stores, typically in the high street will be closed, with a general move towards the likes of retail parks. The group’s freehold estate will pay for some of this transformation, but there will nonetheless be a substantial cost in the overall scheme.

Alongside the Food business, which has long been the jewel in the crown, the joint venture with Ocado (LSE:OCDO) is also proving to be fruitful. The pandemic has of course played into the hands of online retailers, and Ocado saw retail revenues rise 44%, contributing net income to the group of £78 million. Furthermore, it has a delivery capability well in excess of anticipated demand, as indeed does the wider M&S online equivalent.

If this proves to be the year to kitchen sink the numbers, then M&S needs to continue its accelerated transformation to remain relevant. All things being equal, it is expecting to achieve profits of between £300 and £350 million this year, as some exceptional costs drop away and as revenues grow to exceed pre-pandemic levels.

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Despite the undoubted challenges ahead there has been significant progress to date, reflected in a share price which has risen 65% over the last year, as compared to a hike of 33% for the wider FTSE 250 index. However, this only partly mitigates the performance of the last two years, where the shares remain down by 36%. The recent price rally has led investors to conclude that the shares are currently up with events, with the market consensus coming in at a 'hold', albeit a strong one.