Why M&S shares now offer 22% upside

The case for an even higher Marks & Spencer Group (LSE:MKS) share price continues to be made in the City after management yesterday told analysts how much they still have to achieve.

The capital markets day highlighted the opportunities for further sales and profit growth, particularly through technology and supply chain improvements.

Led by chief executive Stuart Machin, the rejuvenated retailer is looking to build on the progress that has already enhanced its value, quality and style credentials.

Its forecast-busting performance has driven a 275% jump in share price to 370p in the last two years, putting M&S back in the FTSE 100 and on the radar of more international investors.

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While yesterday’s event reflected on the considerable progress made in recent years, Peel Hunt said there was “no high-fiving” as the greater focus was on the work still to be done.

The broker said: “Projects to better serve the customer (with laser focus on returns) are afoot. The possible improvements in technology are especially exciting.”

The City firm added: “The overriding feeling was one of an executive team that knows what it needs to do but appreciates that the tasks are not straightforward.

“The shares reflect the mantra from the company: plenty of progress has been made, but there is more to go for. Marks & Spencer remains a key part of the Buy list.”

Peel Hunt continues to have a price target of 450p, meaning a potential upside of 22%.

Deutsche Bank, which has the same valuation estimate, said the capital markets day highlighted that in relative terms M&S has a bigger opportunity to catch up to best practice and deliver efficiency in its cost base than peers.

The bank added: “With consumers still reacting positively to the product offering, an improved store environment and scope to improve convenience and availability we see a decent runway for future sales and profit growth.”

There was no change in the company’s 2028 targets for a one percentage point increase in market share in both divisions, with a minimum 4% margin in Food and 10% in Clothing alongside an improvement in return on capital employed.

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The capital markets day took place a week after Marks & Spencer easily beat expectations by posting half-year profits growth of 17% to £408 million. The performance was driven by a strong second quarter in Clothing and another uplift in Food’s margin performance.

The strong results helped shares touch a fresh nine-year high above 405p, only to later fall back on industry-wide worries over the sharply higher employment costs in the Budget.

Retail analyst Clive Black at house broker Shore Capital said M&S looked well set for Christmas and a few more festive periods after that.

He added: “The capital markets event was not one of fireworks, re-basing or recalibrating, rather it was a candid, grounded but increasingly self-confident appraisal of where the firm is and where it is going.”

Black believes that with the ongoing self-improvement, effective execution and credible investment the shares have the potential to reach “considerably higher peaks yet, albeit perhaps with more gradual accents”.