Retail bellwether Marks & Spencer’s (MKS) latest results (22 May) suggest the food, fashion and furniture seller has embarked on the turnaround which has been long in the making with many false dawns down the years.
Shares in the FTSE 100 retailer are at a fresh five-year high of 300p following the delivery of forecast-beating full-year figures and a first final dividend since 2019. Yet despite the scope for further earnings upgrades, Marks & Spencer’s valuation remains undemanding and a re-rating could drive the next upward leg in the share price.
Encouragingly, the UK consumer backdrop is improving, as demonstrated by May’s two-point increase in GfK’s Consumer Confidence Index to -17, with interest rate cuts still to come thanks to moderating inflation.
As Ian Lance, co-manager of Marks & Spencer shareholder Temple Bar Investment Trust (TMPL), enthuses: ‘What is so exciting is it feels like this turnaround strategy still has some way to go yet this is not yet being reflected in the share price as many investors remain sceptical of the Marks recovery story.’
Results for the year ended 30 March 2024 revealed a forecast-busting, near-60% surge in adjusted pre-tax profit to £716.4 million, demonstrating Marks & Spencer’s effective cost management and operational efficiency.
Led by chief executive Stuart Machin, who believes ‘we are at the beginnings of a new M&S’, the retail stalwart’s new and renewed stores are attracting new customers and returns on investment have been strong.
Having invested hard into price and product quality, Marks & Spencer’s Food and Clothing & Home arms have both now generated 12 consecutive quarters of sales growth and the retailer continues to take market share. M&S is also in the best financial position since 1997.
Shore Capital’s upgraded estimates point to pre-tax profit of £755 million and earnings per share of 25.7p for the year to March 2025, rising to £801 million and 28.1p for full year 2026, leaving the shares on a forward PE (price to earnings) ratio of 10.7 based on next year’s forecasts. That is undemanding and leaves room for a re-rating towards close peer Next (NXT), which trades on north of 15 times earnings.
Marks & Spencer is in good shape but there is still more to do to make the business fighting fit. AJ Bell investment director Russ Mould says the Ocado (OCDO) joint venture ‘needs to pull its socks up’, while Machin sees a ‘substantial opportunity’ to improve the online and M&S App experience.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
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