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Marks & Spencer - rolling lockdowns hurt Q3 performance

Sophie Lund-Yates, Equity Analyst | 8 January 2021 | A A A
Marks & Spencer - rolling lockdowns hurt Q3 performance

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Marks & Spencer Group plc Ordinary 1p

Sell: 238.00 | Buy: 238.40 | Change -7.50 (-3.05%)
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Group revenue fell 8.4% to £2.8bn in the third quarter. That reflects the impact of on-off lockdown restrictions, which had a particularly adverse effect on the Clothing & Home business.

Underlying performance in food was more encouraging, but CEO Steve Rowe said near term trading remains "very challenging" for the group as a whole.

The shares fell 2.1% following the announcement.

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Our view

Coronavirus causes a number of issues for M&S.

The most glaring is dramatic falls in Clothing & Home sales. This isn't helped by M&S' particular specialism in office and event-wear, which are the first to get dumped in favour of leggings and pyjamas.

The deterioration in sales meant huge piles of excess stock were expected to be carried into next year. While it's a big relief to see the group shift more items than planned, that's come at the expense of margins. Slapping sale stickers on everything will help stuff sell, but it's a guaranteed sore point for profits. It's become somewhat of a morose party trick for M&S in recent years.

Clothing & Home sales have been a rock in the river for some time, dragging group performance with it. M&S has an oversized (and very expensive to run) store estate with plummeting footfall, and a lacklustre website that fails to plug the gap.

A little counter-intuitively, this is where we think the current crisis might actually help.

M&S has attempted to reboot itself a few times, but this one feels a bit different. It's been forced to supercharge its efforts because conditions are so tough. This time around almost 8,000 members of staff are being cut, many stores are marked for closure and there are gargantuan efforts to integrate the online and physical stores. The latter is particularly important - coronavirus has accelerated the shift to online and if Marks wants a chance to compete it needs to act quickly. The alleged plans to buy Jaeger (it's brand and stock, not the stores), suggests a concerted effort to become a multi-brand website too.

And it's not just clothes being dragged online. The food business has exceeded expectations, helped by the joint venture with Ocado. This deal couldn't have come at a better time - as the pandemic has transformed online grocery demand across the country.

The food business is the key to future growth in our opinion. It's a genuinely differentiated product, and that makes it an asset. Lack of footfall in travel destinations (think service stations and train stations) and city centres is hurting sales at the moment, but longer term we think there's opportunity.

M&S has put a lot of work into improving its proposition. That seems to be resonating well and goes hand-in-hand with the Ocado launch too.

The final thing to note is a healthier balance sheet. This is by no means in rude health, but we've been impressed by the group's ability to keep cash flowing and net debt down, which gives it some breathing room.

M&S is doing all the right things to sort its problems out. But we wonder if this gusto has come too late. Ultimately, we think the M&S brand will survive both coronavirus and the high street's revolution. But thriving on the other side will depend on whether the newfound momentum and strategic competence can be maintained.

Marks and Spencer key facts

  • Price/Earnings ratio: 13.0
  • 10 year average Price/Earnings ratio: 11.4
  • Prospective dividend yield (next 12 months): 2.9%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

Food sales rose 2.6% on a like-for-like (LFL) basis, and 2.2% overall, to £1.7bn. Excluding hospitality related business, LFLs would have risen 5.7%. Performance was also held back my M&S' exposure to city centre and travel locations, which have seen reduced footfall during lockdowns. This contributed to a 4.5% decline in revenues during the November lockdown in England.

Food sites in large retail parks and Simply Food stores outperformed over the festive trading season. Sales associated with the Ocado retail joint venture remained "strong".

Clothing & Home saw LFLs down 24.1%, and total revenue fall 25.1% to £787m. The decline was largely driven by store closures and a 47.5% rise in online sales wasn't enough to offset them. The decline in full price items was more modest, at -4.8%.

In December sales were down 19.4%, although this was an improvement on the 40.5% falls seen during November lockdowns. The group highlighted it has improved its stock management, helping to reduce the number of excess items.

Internationally, total revenue fell 10.4% to £239m. Of Brexit, the group said: "potential tariffs on part of our range exported to the EU, together with very complex administrative processes, will significantly impact our businesses in Ireland, the Czech Republic and our franchise business in France".

Marks & Spencer issued a £300m bond, with a maturity date of 2026. £136m of bonds, expiring December this year, were repurchased.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.