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Marks and Spencer - volumes continued to grow

Marks & Spencer reported third-quarter sales of ?3.9bn, up 7.2% ignoring the impact of exchange rates.

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Marks & Spencer reported third-quarter sales of £3.9bn, up 7.2% ignoring the impact of exchange rates.

Food sales grew 9.9% on a like-for-like basis to £2.3bn, largely driven by a 7% increase in volume growth. The Remarksable value line performed particularly well, with sales jumping 18%.

In Clothing & Home, revenue rose 4.8% to £1.2bn as less stock has been making its way to the sale rack, resulting in higher average selling prices. Online sales were the biggest growth driver in this division, rising at double-digit rates.

Heading into the new year, M&S called out higher-than-expected wage and business rate costs as challenges to navigate.

The shares fell 4.6% following the announcement.

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

Our view

Trading over the Christmas period has given Marks & Spencer's shareholders plenty to be jolly about. It's a testament to the group's exceptional quality, value and execution, which is being reflected in improved financial performance.

In Clothing & Home, less stock has been making its way to the sale rack, resulting in higher average selling prices. The group's improving style credentials are partly to thank for this, pulling more shoppers through the door and growing its market share over the festive season.

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, leading competitors on volume growth over every month of the final quarter in 2023. Larger stores performed particularly well as more customers turned to M&S for their full shop. At a more premium end of the market, M&S' core customers aren't as sensitive to price.

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 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 a 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 2.0%, 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 12 months, which now sits just above 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: 11th January 2024