Marks & Spencer Group plc (MKS) Ordinary 1p

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Marks & Spencer’s first-half sales rose 5.8% to £6.5bn, driven by Food and Clothing & Home sales growth of 8.1% and 4.7% respectively. Both divisions gained market share in the period, marking four consecutive years of market share growth.

Underlying pre-tax profit rose 17.2% to £407.8mn, well ahead of the £359mn markets were expecting. This was helped by volume growth and cost-cutting initiatives which together more than offset inflationary cost pressures.

Free cash flow fell from £25.6mn to £15.4mn, largely due to the timing of certain receipts and payments. Net debt, including lease liabilities, improved from £2.6bn to £2.2bn.

No full-year guidance has been given. M&S said overall trading in the first five weeks of the second half remains “on track” and that it is “confident” of making further progress.

An interim dividend of 1p per share has been announced, in line with last year.

The shares rose 3.5% in early trading.

Our view

M&S smashed first-half profit expectations thanks to strong volume growth in Food and continued progress on the cost-cutting programme.

In Clothing & Home, sales growth reflects improved customer perceptions of value, quality, and style. That’s by no means an easy feat and is a key reason M&S is able to sell more than 80% of clothes at full price, far higher than many of its rivals.

Profitability in the division dipped slightly in the first half, but since this decline was due to increased investment in improving its digital platforms, we’re not overly concerned. Levelling up its online offering will be key to driving future sales higher, so we’re pleased to see focus and money being devoted here. Underlying performance was good, with the group continuing to gain market share.

But we'd be remiss not to mention how tough the world of clothing retailers is. M&S isn't quite a modern-day heavyweight online, and the longer-term outlook for physical retail is very hard to map.

Demand for M&S food remains robust, with volumes growing ahead of the broader market for four years in a row. Operational changes and efficiencies are delivering cost savings, which are being used to keep food prices down. This is helping to attract more families, who on average spend more on each shop, allowing M&S to scoop up a greater share of the nation’s weekly food budget.

But M&S's joint venture with Ocado, which was a beneficiary of the pandemic, remains loss-making. There’s still potential to significantly improve productivity and revenue, but while losses have narrowed we remain cautious about when this progress will come. The disagreement between the two parties over payments for hitting (or missing) certain performance targets remains up in the air. Tension in a business partnership is far from ideal.

Operational and strategic improvements mean the business is healthier than it has been in some time. Enhanced cash generation and a robust balance sheet have enabled a continued reduction in net debt. This financial stability has seen dividends be restored, after several years of non-payment. While the prospective yield of 1.7% is modest, we can’t knock the progress. As ever though, no dividends can be guaranteed.

Ultimately, M&S is nailing its transition to become a leaner, stronger performing business. No explicit outlook for this year has been given, but the expectation is for further progress. That's led to a significant recovery in the valuation over the past 12 months, which is now in line with peers. That doesn’t look to stretching to us given its high-quality proposition. But potential investors should keep in mind that competition is tough, and volatility in the near term can't be ruled out.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, Marks & Spencer’s management of ESG risk is average.

ESG issues are overseen by M&S’ board and ESG committee, suggesting that these are integrated into the core business. However, ESG-related disclosures only reference a handful of recognised sustainability frameworks. The group has also been accused of not providing full emergency relief payments to garment workers in Sri Lanka affected by the severe economic crisis there.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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