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Marks & Spencer - profits jump and dividend reinstated

Marks & Spencer's half-year sales rose 10.8% to ;pound;6.2bn, with growth across all business segments.

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Marks & Spencer's half-year sales rose 10.8% to £6.2bn, with growth across all business segments. UK Food was the standout performer, with growth in market share and volumes driving sales 14.7% higher to £3.8bn.

Pre-tax profit grew from £208.5m to £325.6m, helped by over £100m of cost-cutting measures and margin improvements across UK Food and UK Clothing & Home.

There was a free cash inflow of £25.6m, compared to an outflow of £215.5m last year. Net debt also fell from £2.9bn to £2.6bn.

Dividend payments have been reinstated, starting with an interim dividend of 1p per share.

Trading has remained strong in October and the group's expecting a good Christmas trading period. Although, M&S did point out uncertainties in the economic backdrop and now expects pre-tax profits to be weighted towards the first half.

The shares rose 6.6% following the announcement.

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Our view

Marks & Spencer has had a very strong start to the year, with profits well ahead of market expectations as margins expanded. The top line grew more modestly but it was encouraging to see the two largest divisions scooping up market share.

Good progress in Clothing and Home, where M&S has struggled in recent years, has to be commended. It shows the extent to which the company has regained its style credentials and it is particularly admirable 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 more shoppers in over the first half.

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 very strong too, and is arguably more protected from the high levels of 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.

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.

But M&S's joint venture with Ocado, which was a beneficiary of the pandemic, is currently struggling. Ocado's replacing its oldest fulfilment centre with a newer and more efficient version in the face of rising losses. This has the potential to significantly improve productivity and it's hoped that by offering better service than rivals, Ocado can win over customers and return to growth. However, we remain cautious about an impending about-turn in fortunes.

Tougher comparables look set to come into play from here. Coupled with an increasingly challenging economic backdrop, second-half growth figures and profits are likely to undershoot the exceptional first-half performance. Regardless, we still expect full-year profits to be significantly higher than last year.

The reinstatement of dividends was another major talking point, starting with an interim payment of 1p per share. While this represents a rather modest forward yield of 2.6%, it's a clear sign that management's comfortable with current cash flows and debt levels. As ever though, no dividends can be guaranteed.

Ultimately, growing market share and margins whilst embarking on a significant cost-cutting programme is a tough balancing act, but M&S has nailed it so far. That's seen a significant recovery in the valuation over the past year, which now sits just below its long-run average. There are still inflation-related uncertainties to be wary of, so some volatility in the near-term can't be ruled out.

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: 8th November 2023