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Marks & Spencer - in-store growth propels profit outlook

Marks & Spencer issued an unexpected trading update covering the first 19 weeks of its financial year...

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Marks & Spencer issued an unexpected trading update covering the first 19 weeks of its financial year, where the group saw market share growth in both its Food, and Clothing & Home businesses.

Like-for-like food sales grew by more than 11% driven by price changes on over 80 of its Remarkable Value lines. Clothing & Home sales grew more than 6% led by in-store growth.

Despite "considerable uncertainties about the economic outlook", full-year profit growth and the half-year results are expected to show a "significant improvement" against previous expectations, which called for revenues to grow modestly.

The shares rose 8.7% following the announcement.

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Our view

Marks & Spencer has started the new year on the right foot, growing market share in its two largest divisions. And there's been good headway on the group's reshape programme, which looks to pivot to new locations and refresh existing stores to create a more productive estate.

Good progress in Clothing and Home, where M&S has struggled in recent years, has to be commended, particularly given the pressure on sales of discretionary items amid the cost-of-living crisis. The M&S brand focuses on quality and value, and has succeeded in drawing shoppers in. In fact, back at the full-year mark, it was ahead of UK Food as the biggest contributor to the bottom line.

While we're impressed by this progress, we'd be remiss not to mention how tough the world of clothing retailers is. M&S isn't quite a modern-day heavyweight online, and the longer-term outlook for physical retail is very hard to map.

Demand for M&S food remains strong too, and is arguably more protected from the rising inflation we're seeing at the moment. At a more premium end of the market, M&S' core customers aren't as sensitive to price. But a sustained period of high inflation or a recession will eventually lead to a dent in sales.

M&S's joint venture with Ocado was a beneficiary of the pandemic but is currently struggling. The Group's put its plans to build new warehouses on hold in the face of record annual losses. It's hoped that by offering better service than rivals, Ocado can win over customers and return to growth. But we remain cautious about an impending about-turn in fortunes.

Under the hood, higher goods costs look set to bite throughout the rest of the year. But thanks to a significant cost-cutting programme and strong in-store performances, operating margin's been steady so far this year. Alongside bumper revenues, that's helping to improve the profit outlook for the full year.

The previous announcement that dividends will be reinstated later this year was music to investors' ears, and a clear sign that management's comfortable with current cash flows and net debt levels. And the fact that half-year results are now set to be significantly ahead of prior expectations adds more weight to the restart, but as ever, no dividends can be guaranteed.

Ultimately, we're impressed with the group's continued progress. But there are plenty of inflation-related uncertainties ahead. Some volatility in the near-term is to be expected.

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.

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.

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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 15th August 2023