High street institution Marks & Spencer (MKS) topped the FTSE 250 on Friday, its shares surging 11% higher to 158.4p after the retailer reported a better than expected start to the year and raised full year profit guidance.
In a surprise update, Marks & Spencer flagged outperformance in food, a ‘good recovery’ in clothing and home sales and issued its first upgrade to earnings for some years, demonstrating that CEO Steve Rowe’s turnaround strategy is delivering results.
RARE PROFIT UPGRADE
Albeit just five months into the financial year to March 2022, and with the caveat there are no further Covid-related trading restrictions, Marks & Spencer now expects adjusted profit before tax for the year to be ‘above the upper end’ of its previous £300 million-to-£350 million guidance.
However, the retail bellwether also warned of ‘substantial uncertainty as to the continued strength of consumer demand, as well as disruption in both supply chains and consequent pressures on costs and margin’.
Profiting from the release of an element of pent-up demand since non-essential retail reopened in April, Marks & Spencer believes its very encouraging start to the year provides ‘strong confirmation of the beneficial effects’ of the changes made under Rowe’s ‘Never the Same Again’ transformation programme.
Over the 19 weeks to 14 August, food sales were up 10.8% on last year’s lockdown-impacted period and 9.6% above the comparable period in pre-pandemic 2019/20.
‘Core categories and retail park locations have traded strongly’, explained Marks & Spencer, adding that ‘hospitality and franchise are progressively improving, although remain below 2019/20 levels’ due to reduced footfall and the nation’s slow return to the office.
Meanwhile, the clothing and home business has seen ‘a good recovery in its performance’, with sales coming in only 2.6% below the levels seen two years ago (pre-Covid) and 92.2% ahead of last year.
Improved full price sales reflected ‘more focussed ranges, fewer promotions and a substantially smaller summer sale’, while Marks & Spencer stressed the pivot to online has continued with store sales down 19.8% on pre-Covid 2019/20 with online sales 61.8% ahead.
THE EXPERTS’ TAKE
‘At this stage we signal an upgrade to full year pre-tax profit of circa 14%, so up from £311.5 million to £352.5 million’, said Shore Capital, the broker adding it is ‘great to be recording an upgrade to profit expectations from M&S. Whilst so, neither the company or us for that matter are getting ahead of ourselves and for good reason. The pandemic is still with and amongst us and so cannot be written off as a potentially negatively disruptive force.’
AJ Bell financial analyst Danni Hewson said: ‘Investors have had to get used to a diet of disappointments from the retailer largely connected to its home and clothing arm.
‘Until now Marks & Sparks has struggled to keep pace with the changes in shoppers’ appetites and the way they shop, i.e. increasingly over the internet as well as in store.’
Hewson continued: ‘It is early days but this encouraging news suggests Marks could be on the road to emulating Next which is excellent at combining its stores and its online capacity to get consumers the products they want when they want them.
‘One swallow does not make a summer, with pandemic risks and supply chain issues still to contend with, but Marks & Spencer’s confidence in lifting guidance so early in its financial year is undoubtedly a positive sign.
‘The food business, which has come to the firm’s rescue time and time again in the last two decades, is still performing robustly and the joint venture with Ocado (OCDO) to provide a web-based offering for its produce is going well.’
