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Marks and Spencer - dividend set to return later this year

Marks & Spencer's saw full-year revenues rise 9.6% to £11.9bn, reflecting growth in all business segments.

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Marks & Spencer's saw full-year revenues rise 9.6% to £11.9bn, reflecting growth in all business segments.

Operating profit fell by 11.6% to £626.6m. Food profits were hampered by the removal of the UK business rates relief, while Clothing & Home profits also declined due to higher goods costs.

Net debt fell slightly from £2.7bn to £2.6bn. Free cash flow fell by £635.6m to £63.6m due to higher capital expenditure and the non-repeat of a change in payment terms in the Clothing & Home division which boosted prior year cash flows.

This year, revenues are expected to grow modestly. Cost inflation of around £150m is expected to be offset by more than £150m worth of savings from the structural cost reduction programme.

The group plans to restore a "modest annual dividend", beginning with an interim dividend at the results in November.

The shares rose 12.4% following the announcement.

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Our view

Marks & Spencer's full-year revenues continue to climb, with all divisions ringing higher numbers through their tills.

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, 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. But a sustained period of high inflation or a recession will eventually lead to a dent in sales.

Under the hood, higher goods costs are hurting margins and cost inflation looks set to bite throughout the rest of the year, but a significant cost-cutting programme is expected to more than offset this. Continuing 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 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.

The announcement that dividends will be reinstated later this year was music to investors' ears. The group suspended dividends at the start of the pandemic to help shore up the balance sheet, so the reinstatement's a clear sign that management's comfortable with current cash flows and net debt levels. As ever though, no dividends can be guaranteed.

Ultimately, we can't knock the group's continued progress. But there are plenty of inflation-related uncertainties ahead, and that's starting to show on the bottom line. 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: 24th May 2023