Marks & Spencer profit upgrade hints at long-awaited new dawn

Proclaiming that the “hard yards” of its turnaround plan are finally starting to bear fruit, M&S upgraded its earnings outlook for the second time this year as its first half results came in well ahead of expectations, driven by food sales. Full-year profits are now expected to be “in the region of £500 million”, substantially higher than analysts were predicting even after the retailer in July issued its first profit upgrade of this century.

However, chief executive Steve Rowe cautioned that cost pressures will increasingly come to bear as the group faces continued headwinds from Brexit and the pandemic. These include “well-publicised” supply chain disruptions, rising labour costs, EU border challenges and tax increases.

“Given the history of M&S we’ve been clear that we won’t overclaim our progress,” Mr Rowe said.

“But…it is clear that underlying performance is improving, with our main business 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.”

Marks & Spencer chief executive Steve Rowe

The 137-year-old group’s clothing business has been struggling since before the coronavirus pandemic, with sales falling for eight years amid a reputation for “frumpiness”. Mr Rowe and M&S chairman Archie Norman are overseeing a restructuring of the business to improve the quality and value of its clothing and food offering, while also overhauling its store estate, back-end technology and online offering.

The retailer sold more than two million pairs of women’s jeans during the six months to October 2, and saw a 50% increase in sales across its Goodmove activewear brand. Suit sales increased by 3% as customers returned to the office from home working.

High street sales of clothing and homeware fell by nearly 18%, but online sales increased by 61%. The overall result was a 1% decline in clothing and home sales compared to the same period in 2019, before the pandemic impacted trading.

Food sales therefore did the heavy lifting during the first half, driven by the group’s tie-up with online supermarket Ocado. M&S products account for circa 29% of the Ocado basket, lifting total food sales by 10.4%.

“Given Ocado’s expansion plans, the growth outlook in this category looks tasty for M&S,” said Ross Hindle, an analyst at Third Bridge.

Group revenues in the first six months were £5.1 billion, up 5% on the same period two years earlier. This generated a pre-tax profit of £187.3m, which bested both last year’s loss of £87.6m and £158.8m profit the year before that.

READ MORE: M&S delights with surprise profit upgrade

“Credit is due to the management team for turning around something that was heading towards being uninvestable to being a potentially attractive recovery story,” said John Moore, senior investment manager at Brewin Dolphin.

“However, there is still a question mark around the next steps as the company moves beyond its so-called ‘fixing the basics’ phase.”

Mr Rowe said some of the group’s higher costs would be passed on to customers, but added that increases so far had been less than half the 2.1% inflation seen across the wider UK grocery market. Despite supply chain difficulties, Mr Rowe also assured that shoppers will not be faced with big gaps in the M&S offering during the run-up to Christmas.

“As we see it today our plans are in place to make sure that we have everything that customers need at Christmas,” he said.

“Is it perfect, no, definitely not. Is there a fantastic range available for our customers in key areas of knitwear, casualwear, coats and Christmas gifting, yes there is.”

Shares in Marks& Spencer closed yesterday’s trading more than 16% higher, up 32.5p at 226.5p.