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Marks and Spencer - all divisions performing well

Ignoring movements in exchange rates, Marks & Spencer grew group sales 9.9% to 3.6billion basis during the third quarter.

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Ignoring movements in exchange rates, Marks & Spencer grew group sales 9.9% to £3.6bn during the third quarter, with growth in all business segments.

The group's largest division, M&S Food, outperformed the market in both volume and value terms during the critical Christmas period. This saw its Food division grow sales by 10.2% to £2.1bn over the period. The Clothing & Home division also saw sales rise 8.8% to £1.2bn.

The group credited its omnichannel platform for its success, with click and collect orders growing by 20%, and third party brand sales growing by roughly 50%.

Despite cost pressures and inflationary headwinds, the group still expects the outcome for the full year to be in line with previous guidance given in November.

The shares fell 1.3% following the announcement.

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

Our view

Marks and Spencer achieved considerable sales growth over the Christmas period, even outperforming some of its larger peers. The group's recent acquisition of logistics provider Gist has started to have a positive effect on total food sales. The acquisition of Gist should give M&S more control of its supply chain, and help to rebuild margin.

The improving trends in Clothing & Home sales is another serious benefit. Not only is it enjoying steep 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. 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.

Under the hood M&S has become slicker. 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.

Despite having a more resilient customer base than most of its peers, a sustained period of high inflation or a recession will eventually lead to a dent in 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.

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.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 12th January 2023