On 10 March, Marks & Spencer announced that CEO, Steve Rowe, will step down from his role on 25 May. He will be replaced by M&S Food Director and Chief Operating Officer (COO) Stuart Machin. Katie Bickerstaffe, who is currently joint COO, will become Co-CEO.
After stepping down in May, Steve Rowe has agreed to remain as an adviser to the new leadership for up to twelve months
The shares were down 1.5% following the announcement.
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Our view
Steve Rowe's overseen one of the most challenging periods in M&S history, so it's a shame to see him go. But with most of the heavy lifting on the new strategy shift done, this is a natural time to welcome a fresh pair of eyes.
The fact that replacements are at the ready is reassuring and reduces transition risk. That means it's the bigger picture investors should be focussed on.
The pain of the pandemic meant M&S was forced to speed up its restructuring efforts. Years of lacklustre sales coupled with burdensome property costs were already dragging profits down. Up to 30 stores are to close, and countless roles have been made redundant across numerous levels.
Marks seems to be nearing the end of this painful journey--Clothing and Home posted its second consecutive quarter of growth during the Christmas period. It's not out of the woods yet, but it suggests the underlying business still has something to offer now the fat's been trimmed.
The pivot is also providing a very welcome shot in the arm to online sales. That's an area M&S has sorely struggled with in the past. Expanding in-store fulfilment capacity helped the group make the most of this asset during the all-important Christmas period, a move that should continue to pay dividends moving forward.
The paired back Clothing & Home business means grocery now takes top billing, and performance to date has been impressive. We're not clear how much of the buoyant food sales can be put down to the joint venture with Ocado. But certainly, the deal has done the group no harm. It's allowed M&S to ride the wave of increased online grocery shopping - something it would otherwise have had to watch from the side-lines. With a genuinely differentiated offer, we think the business has potential.
M&S food is also more protected from rising inflation. M&S' core customers aren't as sensitive to price, which is a more defensive area to be in when people don't feel like they have as much spare cash.
Under the hood M&S is slicker too. It's improved its payment terms with suppliers, and good cost control means free cash flow is enjoying a boost. Net debt levels are in a much more comfortable position too. Still, investors shouldn't bet on out-of-this-world dividend growth- there's a lot of lingering uncertainty.
Physical retail is in structural decline--particularly when it comes to large scale department store models. That's a big, industry-wide risk that M&S can't fully avoid. It's still heavily reliant on its bricks-and-mortar business and unlikely to ever pull away completely.
Ultimately, we can't knock management's impressive about-turn. The recent sales surge adds to confidence in management's new higher profit goals. The price to earnings ratio is some way below the longer-term average, which is partly because of uncertainty surrounding the Ukraine conflict, but also reflects the longer-term challenges that come with being a physical retailer. If M&S can continue to prove it's nimble enough to compete in a tough market, the shares could rerate. As ever, there are no guarantees.
Marks and Spencer key facts
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.
Third Quarter Results (13 January 2022)
In the 13 weeks to 1 January, group sales, excluding currency movements, were £3.3bn and 8.5% ahead of pre-pandemic levels. This was driven by record trading through the Christmas period and growth across all parts of the business.
Management now expects full-year underlying pre-tax profits of at least £500m, assuming no further covid-related restrictions are imposed.
Food sales rose 12.4% from pre-pandemic levels to £1.9bn, driven by sustained larger basket sizes and a strong performance from Retail Parks and Simply Food stores. Christmas sales in the division hit record highs and M&S products performed well on Ocado.com, making up roughly 30% of baskets in December.
A 45% increase in full price sales helped Clothing & Home deliver its second consecutive quarter of growth, with sales rising to £1.1bn, up 3.2%. Online sales rose 50.8%, helped by the expansion of in-store fulfilment. In-store sales were down 10.8%, with stores in retail parks outperforming those in city centres.
International sales rose 5.1% to £272m, as online sales more than doubled.
During the period the group sold two warehouses for £42.5m, repaid bonds that matured in December, and signed an £850m revolving credit facility to mature in June 2025.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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.
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