Marks and Spencer Group PLC (LSE:MKS)'s share price rose by almost 10% on Wednesday after the stalwart of the UK high street said it would reinstate a shareholder dividend on the back of steady sales growth.
The market responded positively to the retailer’s group financial results for the first six months of fiscal 2024, though M&S warned that despite the strong start to the year its sales could be front ended.
Aside from the prospect of a dividend, a 10.8% increase in M&S’s statutory revenue, which rose to £6.1 billion year over year, and pre-tax profit leap of 56% to £325.6 million spell good news for shareholders.
The retailer has returned to positive free cash flow that has enabled it to reduce net debt by 13% to £2.56 billion, according to analysts.
A bulk of profit may have been concentrated in the first half, M&S warned, and against an “uncertain” consumer environment, it is unclear whether consumer demand will continue apace.
"Transformation at speed"
M&S launched a Reshaping initiative last October, in which it planned to introduce cost controls and grow online sales.
According to its half-year results, cost savings are expected to rise to £150 million for the year as a whole, up from £100 million, an indication that the cost reductions could bve working.
Shore Capital analysts, which label M&S as ‘house stock’, called the retailer’s first half “staggeringly successful”, raising its profit before tax forecast by 39% year to date.
M&S management did say there was “more to do to drive online and improve returns on data, and technology investment”, though analysts point out that users of the M&S app grew 7% to nearly five million.
Oline sales grew 4.6% year on year with growth in its online adjusted operating profit margin to 9%, with 40% of clothing and home sales involving the app.
The retailer’s half year profit before tax came in ahead of estimates at £360 million, above Shore Cap analysts’ estimates of £287 million.
They updated full-year forecasts by 12% to £646 million, but anticipate “broadly flat” second half year on year ahead of the Christmas trading period.
Richard Hunter, head of markets at interactive investor, said “M&S continues its transformation at speed”.
“A rejuvenated M&S has led to a blistering share price performance, with a rise of 96% over the last year culminating in its return to the FTSE100 in September,” said Hunter.
“From here on in, expectations and indeed comparatives are likely to become tougher, although at these levels the shares are not looking especially expensive based on historic valuations.
“The market consensus of the shares as a strong hold reflects the fact that the share price progress is unlikely to remain linear, while also recognising that most investors are content to stay on the ride.”
He said the bedrock of the retailer’s food business is “providing a springboard” for the revitalised clothing and home business.
“Clothing & Home is fast becoming the poster child for the new-look M&S,” said Hunter, noting the acceleration of its store rotation programme and revamped stores.
Sales in clothing and home rose by 5.7% in the half year, with adjusted operating profit increasing by nearly a third to £223.4 million.
Clothes and home comprised 30% of group sales and 54% of operating profit across the group, demonstrating “its increasing value to the business as a whole”, said Hunter. Food now comprises 62% of group sales and 40% of operating profit.
Clothing sales were boosted by full price sales, where M&S chose to increase some prices without losing out on volume, while its food business expanded its lines and offered discounted items alongside higher-end offerings.
Sales rose by 14.7% in the food segment, with adjusted operating profit soaring by 130% to £164.9 million and its margin grew from 2.2% to 4.3%.
Ocado "thorn in the side"
Hunter warned that the “thorn in the side” of the business is its joint venture with Ocado, “which has yet to establish itself in anything like the way the group had originally envisaged”.
The share of loss attributed to that Ocado joint venture was £23.4 million, up from £700,000 a year ago, despite sales growth of 6.9% during the half year and an increase in active customers stemming from its Big Price Drop and increased range.