Marks and Spencer Group PLC's (LSE:MKS) annual results may have fallen short of the market’s longer-term profit hopes, but investors appeared willing to look through last year's cyber disruption and focus instead on signs that the retailer’s recovery remains on track.
Shares in M&S rose 4% by midday on Wednesday after the retailer reported adjusted pre-tax profit down 24% to £671.4 million following a cyber incident and weaker performance in clothing.
However, fourth-quarter trading proved stronger than many analysts had expected, particularly in food and fashion.
Deutsche Bank said clothing like-for-like sales rose 4.3% in the fourth quarter, ahead of forecasts for 1% growth, while food sales increased 6.8%, broadly matching expectations.
Food remained the standout performer. Full-year food sales rose 7%, with operating profit of £444.5 million comfortably ahead of consensus forecasts despite margin pressure from markdowns and waste linked to the cyber disruption.
Fashion, Home & Beauty continued to lag, with annual sales down 7.5% on a like-for-like basis and operating profit more than halving to £213 million.
Still, Deutsche Bank noted both stores and online returned to growth in the fourth quarter.
The main debate now centres on how quickly profits can recover in the 2027 financial year.
M&S only guided to “profit growth” against the prior year, while warning over higher fuel, freight and tax costs.
Deutsche said consensus forecasts of around £960-970 million pre-tax profit "may nudge down today", though analysts added many in the City were already expecting downgrades of £20-30 million.
Broker Peel Hunt struck a more optimistic tone, saying it was a "strong finish" to the year, with profit ahead of the consensus, "implying second-half growth in underlying PBT, despite the cyber hangover".
Other positives were highlighted, with Ocado moving into a modest positive contribution, new large-format stores performing ahead of plan, and the balance sheet finishing the year with net cash of £338 million.
It was noted that M&S continues to "carry the drag of distribution inefficiency and short-term costs" from temporary warehousing and inefficient routes, while additional distribution centre capacity and investments come onstream - such as the recent purchase from Asos.
"In our view the company remains on the path to delivering £1+bn of adjusted PBT, with the fully recovered M&S still not being priced in by the group’s low PE," Peel Hunt said.
Shore Capital, house broker, said food trading was “humming” and the group is "making progress in more challenging markets".
Shore's analysts maintained their £925 million pre-tax profit forecast for the 2027 financial year and said stronger cash generation could eventually support more shareholder returns.
This makes for a "fundamentally undervalued equity to us", with the shares trading for 10.0 times forecast earnings, with scope for circa £500 million-plus year-end non-lease net cash balances and "a quite enormous discount to what we consider eligible peers".
"A return to the trajectory of sequential EPS growth, which we expect, with strong cash generation and so growing shareholder optionality in tow, maybe more in FY28, implies quite considerable rating expansion potential, in our view."