Marks & Spencer (MKS) 152p

Loss to date: 14.9%

Original entry point: 178.5p, 2 September 2021

With all that has happened since September last year and the swathe of disappointments across the consumer discretionary sector we are pleased with Marks & Spencer’s (MKS) performance against the odds.

Sales for the year to the start of April were £10.88 billion, up 18.7% on the previous year and nearly 7% above pre-pandemic levels.

Meanwhile, operating profits trebled to £709 million, 20% above pre-pandemic levels, demonstrating how much progress the firm has made in lowering costs and improving margins.

Outgoing chief executive Steve Rowe was understandably chuffed: ‘For me, what is important about these results is not just the restoration of profit and strong cash flow; it is that they demonstrate that M&S has fundamentally changed.’

The food division delivered a 10.1% increase in revenues and has been transformed into a high-performing business with market-leading like-for-like sales growth on a 12-month basis.

Clothing and home, long the weakest division, actually delivered a 3.8% increase in revenues driven by a more than 50% increase in online sales.

The number of lines has been dramatically reduced and discounting has halved, improving the brand perception and putting the business ‘on track for a more profitable model capable of growth’.

‘While there is much more to do, the business has moved beyond proving its relevance and has the opportunity for substantial future growth’, said Rowe.

Trading in the first six weeks of the new financial year has been ahead of last year, which is encouraging, with a ‘particularly strong’ showing in clothing and home.

However, with input prices rising, pressure on consumers, no business relief on its UK operations or any income from Russia, profits aren’t going to grow this year, especially if the new management team wants to keep investing.

Also, while the half-share in the Ocado Retail joint venture made a small contribution to earnings last year, the business lowered its sales and profit forecasts for this year on the back of the weak consumer environment which was hardly a great surprise

Nevertheless, says Rowe, ‘with improved profitability and cash conversion, and financial net debt under a third of 2019/20 levels, the business is resilient to the macroeconomic headwinds while having flexibility to invest in our transformation priorities’.

Clive Black, head of research at house broker Shore Capital, believes Marks & Spencer’s shares have been pricing in ‘a major profit warning’, and notes the shares are on 8.5 times this year’s earnings.

SHARES SAYS: We’re sticking with our call and would buy more at these levels. 

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