M&S (LON:MKS) continues its transformation at speed, with the bedrock of the Food business providing a springboard for the revitalised Clothing & Home business.
Indeed, Clothing & Home is fast becoming the poster child for the new-look M&S. The lines and the look of the offering are clearly appealing to the new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image. The store rotation programme is being accelerated and selected stores revamped to project a more fashionable and less cluttered experience than has been the case in the past.
During the half year in C&H, sales increased by 5.7%, adjusted operating profit rose by 30% to £223.4 million and margin grew to 12.1% compared to 9.8% in the corresponding period last year. A number of its lines grew particularly strongly, such as holiday and denim, while its online business saw growth of 4.6% in sales, and margin of 9% from a previous 6.9%. The unit was also boosted by a high level of full-price sales, where M&S could introduce selected price increases without sacrificing volumes. In this period, C&H accounted for 30% of group sales and perhaps more tellingly 54% of group operating profit, underscoring not only its growth trajectory but also its increasing value to the business as a whole.
Food also enjoyed a strong half, bolstered by new lines, investment in some discounted prices and an ongoing mix of higher end offerings. As a result, sales grew by 14.7%, adjusted operating profit soared by 130% to £164.9 million and margin rose from a previous 2.2% to 4.3%. Based on this half year, the unit accounts for 62% of group sales and 40% of group operating profit, and has long been a reliable contributor to the fortunes of the wider M&S strategy.
The thorn in the side to the business remains the joint venture with Ocado (LON:OCDO), which has yet to establish itself in anything like the way the group had originally envisaged. Despite sales growth of 6.9% in the half and an increase in active customers due to promotions such as the “Big Price Drop” and an increased M&S range, the share of loss attributed to the venture was £23.4 million, compared to £0.7 million in the corresponding period and concerningly close to the £29.5 million for the entirety of the previous year.
Even so, the group as a whole has made significant inroads into its transformation. At a headline level, revenues increased by 10.8% to £6.1 billion, while pre-tax profit ploughed ahead with a jump of 56% to £325.6 million. A return to positive free cash flow has enabled a reduction of 13% to net debt, which now stands at £2.56 billion. Cost savings of £100 million in the half are expected to rise to £150 million for the full year, with the generally improved performance also allowing the restoration of the dividend as had been previously trailed. The amount of the dividend is nominal, but nonetheless is a statement of management confidence and reflects the improving health of the entire business.
In terms of outlook, M&S is treating the situation with caution, estimating that the bulk of profit for the year may have come in this half. Against an increasingly uncertain consumer environment, it is unclear whether the tailwinds of the last six months – favourable market conditions, resilient consumer demand and competitor exits – will be maintained. In the meantime, the early indications have been positive for its Christmas lines, and trading momentum has been strong throughout October, after the end of this reporting period.
Even prior to today’s strongly positive reaction, 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. 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.