As Marks and Spencer Group PLC (LSE:MKS) shares climbed more than 7% on Tuesday, reaching an 18-month high, it is in place to reclaim its place in the FTSE 100 two years after being relegated.
With many retailers struggling and 10 profit warnings emanating from the sector in the first half of this year, what has this troubled old dame of the high street got right in its impressive first half performance that others have not?
There are parallels with recent successes of near-neighbour Next, say analysts, but also some notable differences.
Yo-yo years
Consumers' down-trading and Covid led to four years of yo-yo-ing profit growth at the retailer, with last year’s earnings still dropping despite it representing the first full year unaffected by pandemic regulation.
There were also problems that were largely or partially self-made.
“It’s difficult, M&S normally sell premium price products, its website wasn’t doing everything you’d like it to do and it didn’t really get its hand around the clothing business,” Russ Mould, investment director at AJ Bell, told Proactive.
Today it said it expects interim results to beat prior guidance, with a 6% sales increase in its clothing division and an 11% jump in food sales also enough to enable it to predict a year-on-year rise in 2024 profits.
Profit margins were better than expected, fewer items ended up in summer sales and strong sell-through rates were all causes for the strong performance in clothing, adds Clive Black, head honcho of analysis at Shore Capital.
Racking up clothing sales (Source: M&S)
Mould believes some astute appointments to its home and clothing division, some of which were brought in from the collapsed Arcadia Group, are a driving force in these changes.
“They've clearly been well trained with an awful lot of common sense and skill, which they're bringing to M&S, with enormous benefits to them,” Mould added.
Improving product ranges and running stock tighter has led to less discounting and therefore has eased margins, the AJ Bell analyst said.
Return to in-person
Next PLC (LSE:NXT), the clothing retailer rival, is also experiencing an uplift in 2023, having not long ago upped profit guidance by £10 million, with the group saying improved clearance rates and robust customer demand were the key driving forces.
Reverting from digital back to in-person appears to be the trend for retailers this year, e-commerce players like Asos and Boohoo have stumbled – the former by 25% – while M&S is up more than 72%.
Escalating numbers (Source Birmingham Live)
Arguing that consumers have “been delighted to get back into shops”, Mould believes online retailers like Asos and Boohoo may have struggled because they were too optimistic about performances post-pandemic – as well as leadership issues of course.
“Those companies probably believed a little bit of their own press after the pandemic and so buy too much stock and are stuck with it, having to discount their way out of it,” he added.
FTSE 100 promotion
Shares in M&S are currently sitting at a near 19-month high and are more than 120% higher than the post-Covid trough experienced in October last year, something the group’s new management will be keen to point out.
Stuart Machin, the group’s chief executive officer, Katie Bickerstaffe, co-CEO, and Jeremy Townsend, chief financial officer, were all appointed in 2022 and their input has shifted the way analysts view the stock, which has been going through a turnaround for what feels like most of the last decade.
Shore Cap's Black said: “It is taking a long-time for M&S to overcome understandable investment community doubt and scepticism when looking at the earnings profile over the years.
“Whilst so, we do sense a capability, competence, and confidence now within the business… which suggests more resilience, more robustness, and perhaps that scope for the sequential earnings growth.”
Now boasting a market cap of around £4.3 billion after the unexpected update on Tuesday, Marks looks set to reclaim its position in the blue-chip index for the first time since its relegation in 2019, having jumped Frasers Group and a whole host of housebuilders.
Official interim results from the company are not until November, but the FTSE reshuffle will be determined by market valuations at the end of August, meaning it could be a blue chip again when the official numbers are unveiled.