The strong momentum continues to build at M&S, with the key festive trading period bolstering a recent performance which has revitalised the entire business.
The most striking element of the group’s transformation is in the Clothing & Home unit, which currently accounts for 32% of group sales and, as reported at the half-year update in November, over half of group operating profit. Its offering is 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. Indeed, M&S reports that “style perception continued to improve” over the latest quarter, with womenswear being a standout performer.
Quite apart from this newly found attraction to its lines, the company has also been making some subtle changes. Reduced promotions have led to a higher average selling price on its offerings and, where discounts have been put in place, the group has managed to carry less stock going into the sales. An increase in the full price sales mix will inevitably have a positive effect on margins, while market share has also at its highest in more than a decade.
The Food business has also cemented its position as a core contributor to the business as a whole. Sales grew by 10.5% over the period, led by its innovative and popular ranges, and with the unit accounting for 60% of group sales the progress will have had a marked impact on overall profitability. As an aside to the specialist ranges which the company provides, such is the nature of the revamped stores that there has also been a noticeable increase in customers choosing M&S for their full shop.
The combination of the Food and Clothing & Home units propelled overall group sales to increase by 7.2% over the period, despite some weakness in the International business which underwent some challenging market conditions in India and the timing of franchise shipments in the Middle East and Asia. In addition, and outside the scope of this update, 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.
In terms of its outlook, M&S remains confident of hitting market expectations for full-year profit, particularly given the festive season boost. At the same time, the company recognises the nearer term challenges arising from geopolitical and consumer risks, while higher than expected business rates and wage inflation could also prove to be something of a drag. Indeed, it is unclear whether the tailwinds of the last several months - favourable market conditions, resilient consumer demand and competitor exits – will be maintained.
Even so, the company remains committed to drive market share growth, improve the supply chain and continue with the transformation programme, including more store rotation, to mirror the group’s improving image. Indeed, the previous restoration of the dividend potentially marked a turning point, While the yield and the payment remain nominal, the move was certainly a statement of both management confidence in prospects while also reflecting the improving health of the entire business.
The initial share price reaction to the update contains an element of inevitable profit taking after what has been a blistering share price performance, culminating in the group’s return to the FTSE100 in September. In addition, and 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. This follows a meteoric rise of 97% in the share price over the last year, as compared to a dip of 0.9% for the wider FTSE100. The more recent upgrade of the market consensus to a buy is also reflective that investors still have high hopes for a recovery story which is clearly in place.
