M&S shares jump to post-pandemic high on improved outlook

Marks & Spencer Group beat expectations in the first half and raised its outlook for the rest of the year, sending shares to their highest level since the pandemic started. We look at where M&S shares could be headed next.

Uptrend 2

M&S raises profit guidance

M&S said it is now expecting to deliver an adjusted pretax profit ahead of expectations at around £500 million this year.

That is a large upgrade from its previous target range of between £300 million to £350 million.

If delivered, that would also mark a strong improvement from the £50.3 million profit booked in the last financial year when results were hit by the pandemic, and also rise above the £403.1 million delivered the year prior, before the Covid-crisis started.

 

M&S beats expectations in first half

The upgrade came as M&S reported interim results covering the 26 weeks to October 2.

Sales before adjusting items came in at £5.11 billion, bang on analyst estimates. That rose from £4.10 billion the year before and also improved from the £4.86 billion in sales booked two years ago, before the pandemic hit.

Adjusted pretax profit came in at £269.4 million, slightly ahead of the £264.0 million pencilled in by analysts. That turned from a £17.4 million loss last year and rose almost 53% from the £176.3 million profit booked two years ago.

Reported pretax profit came in at £187.6 million and swung from the £87.6 million loss seen last year, while rising 18% from the £158.8 million profit booked two years ago.

‘Given the history of M&S we've been clear that we won't overclaim our progress. Unpacking the numbers isn't a linear exercise and we've called out the Covid bounce back tailwinds, as well as the headwinds from the pandemic, supply chain and Brexit, some of which will continue into next year,’ said CEO Steve Rowe.

‘But, thanks to the hard work of our colleagues, it is clear that underlying performance is improving, with our main businesses making important gains in market share and customer perception. The hard yards of driving long term change are beginning to be borne out in our performance,’ he added.

M&S said trading in the first four weeks of the second half has been ahead of expectations and that it anticipates the strong demand to be sustained.

 

Food and clothing & homeware both see strong rise in profits

M&S said food sales were up 10.4% on a two-year basis, but clothing and home sales were down 1%. Still, both divisions reported higher profits than two years ago. Adjusted operating profit from food jumped to £143.7 million from £92.2 million while profits from clothing and home sales climbed to £156.2 million from £109.6 million.

M&S said the rise in profits from its food business was driven by an improving margin mix. It said it has gained market share as consumer spending has rebounded from the pandemic and said they have responded well to its reshaping of M&S Food. Plus, M&S Food was the ‘best performing UK grocery chain’ in the 12 weeks to October 3, according to data from Kantar.

Meanwhile, the focus within the clothing and home division has been to reduce discounts and drive full price sales, which were up 17.3% in the first half to help boost profits. Clothing and home has also continued to reap the benefits of strong demand online, with online sales up over 60% in the period and now accounting for over 34% of the division’s sales. Store sales remain well below pre-pandemic levels.

 

M&S warns dividend unlikely this year as cashflow improves

Free cashflow also improved markedly to £287.6 million from just £88.1 million last year, allowing M&S to slash its net debt to £3.15 billion from £3.82 billion 12 months ago.

M&S is not paying an interim dividend despite the improved performance as it is prioritising investment to drive the business forward and return to ‘sustainable profit growth’.

‘We will assess the reintroduction of dividend payments in this context although this remains unlikely in the current year,’ M&S warned.

 

M&S expecting significant increase in supply chain costs

While M&S has upgraded its profit expectations, it also warned that it is expecting ‘significant supply chain cost increases in the second half of the year with further on-costs next financial year.’

This is down to the myriad of headwinds hitting supply chains for several industries, predominantly a shortage of drivers and warehouse workers, but also ‘pandemic supply interruptions, rising labour costs, EU border challenges and tax increases’.

It said these cost rises will ‘increase the importance of our productivity plans, store rotation and technology investment.’

 

Where next for the M&S share price?

The Marks and Spencer share price had been trading within an ascending channel since October last year. The price has broken out, rallying to 235.50p, a level last seen in December 2019. 

The RSI has surged into overbought territory so some consolidation at this level or an easing back could be on the cards. 

A break above 235.50p could bring 277p into focus, a level last seen in April 2019. 

On the flipside, support can be seen 204p, the upper band of the rising channel. A break below here could expose the 50 sma 185p and the 200 sma 160p.  

Where next for the Marks and Spencer share price?

 

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