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Marks & Spencer - robust sales but margins are suffering

Over the first half, Marks & Spencer grew sales 8.8% to £5.6bn.

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Over the first half, Marks & Spencer grew sales 8.8% to £5.6bn. It enjoyed growth in all areas of the business, with UK Clothing & Home and International performing strongest, both with sales up 14%.

Underlying operating profit fell 23% to £280.7m. Within this, UK Clothing & Home, and International managed high single digit increases. But this wasn't enough to offset a 50% fall in UK Food profits, to £71.8m. £19.7m of this fall can be explained by business rates relief that was not repeated.

The rest of the decline was down to inflationary pressures, which M&S has not fully passed onto its customers, as well as an increase in stock wastage.

There was a free cash flow of £215.5m against an inflow of £287.6m. Net debt was 7% lower at £2.93bn. M&S continues to consider resumption of the dividend, but has not done so as yet.

M&S expects the outcome for the full year to be in line with previous guidance, but sees the year ending April 2024 as more challenging. For that period, the Group's targeting £150m of extra cost savings.

The shares were down 3.4% following the announcement.

View the latest Marks & Spencer share price and how to deal

Our view

Marks and Spencer achieved first half sales growth considerably better than some of its larger peers. Sales growth in UK Food has come at the expense of a big hit to margins. M&S has acquired the UK Food division's main logistics provider, Gist. The aim is to take more control of the supply chain, and to rebuild margin.

The cost-of-living squeeze is expected to continue to weigh on performance. This is largely outside of M&S' control - and while it shouldn't be ignored, we think it's important to look at the bigger picture.

Most notably, the improving trends in Clothing & Home sales is a serious benefit. Not only is it enjoying double digit sales growth, but it's also managing to grow profits. In fact, it's overtaken UK Food as the biggest contributor to the bottom line.

M&S has been forced to grasp the nettle and shrink its store estate after years of lacklustre sales coupled with burdensome property costs dragged profits down. It's still looking to close over 60 stores, and now aims to do this over a three year period, two year's faster than previously planned.

We can't knock progress, but 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.

M&S's joint venture with Ocado was a beneficiary of the pandemic but is currently struggling. The Group's banking on new leadership and a refreshed customer offer to help revive fortunes at the online food delivery business.

Demand for M&S food 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 that isn't the same as being immune. Sustained high inflation or a recession will eventually start to dent sales and hamper margin recovery. Increased investment in online capacity is also going to hold things back from a profit perspective in the short-to-medium term.

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.

With a resumption of the dividend far from certain, we would urge investors to treat the prospective dividend yield with extreme caution, as there is no guarantee there will be any pay out at all.

Ultimately, we can't knock management's impressive about-turn in the face of the pandemic. 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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 9th November 2022