Marks & Spencer Group plc (MKS) Ordinary 1p

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Marks and Spencer’s first-half sales rose by 22.1% to £8.0bn. Food sales were up 7.8%, while Fashion, Home & Beauty sales declined by 16.4% due to the cyber-attack halting online sales between late April and early June.

Underlying pre-tax profit fell by 55.4% to £184mn (£122mn expected), including £100mn of insurance proceeds. Operational performance was negatively impacted by the cyber-attack which also resulted in increased stock management costs and higher markdowns and wastage in food.

Free cash flow fell from an inflow of £15mn to an outflow of £196mn. Net debt, including lease liabilities, rose from £2.2bn to £2.5bn.

M&S expects second-half profits to be at least in line with last year, pointing to underlying pre-tax profits of at least £468mn.

The shares were broadly flat in early trading.

Our view

Marks & Spencer is on the road to recovery after a cyber-attack crippled online sales in its Fashion, Home & Beauty division earlier in the year. While that’s driven a sharp decline in first-half profits, operations are expected to return to normal before the end of its financial year, sparking hopes that second-half profits can rebound above last year’s level.

To help offset some of the financial impact from the cyber-attack, cost-saving targets have been raised by £100mn, and management’s looking at other trading initiatives to improve financial performance. With the all-important festive trading season fast approaching, getting back to normal can’t come soon enough.

Back to underlying performance and demand for M&S food remains robust, driven by increased customer numbers and a growing market share. New products and a continued focus on affordability should also help to attract more families, who on average spend more on each shop.

Fashion, Home & Beauty sales were hit hardest by the cyber-attack in the first half. But underlying trends remain positive, reflecting improved customer perceptions of value, quality, and style. New and improved stores are a key part of the growth story here. Its recent openings are gaining momentum, and there’s many more openings planned for the years ahead.

M&S's joint venture with Ocado remains a drag on performance, but losses are narrowing. There’s still potential to significantly improve productivity and revenue, but we remain cautious about when this will start to have a meaningful positive impact on the bottom line. The disagreement between the two parties over payments for hitting (or missing) certain performance targets remains up in the air. Tension in a business partnership is far from ideal.

The cyber-incident looks to have sharpened management’s focus on operational and strategic improvements within the business, and we’re optimistic that the group can bounce back stronger. The balance sheet remains in decent shape, and there’s a prospective dividend yield of 1.7% on offer, but as always, no dividends can be guaranteed.

M&S remains a healthy business and with expectations now reset, the worst appears to be over. Sitting at a discount to peers, the valuation offers attractive upside in our view. Still, competition is fierce, and there’s no guarantee operations will recover on management’s timeline.

Environmental, social and governance (ESG) risk

The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.

According to Sustainalytics, Marks & Spencer’s management of ESG risk is strong.

The group plans to become a net zero business by 2040, with scope 1, 2, and 3 emissions targets in place. The addition of doors and panels on store refrigeration devices is a critical step towards increasing energy efficiency. However, there’s a reluctance to put an obstacle between customers and their products, especially when it’s not commonplace in the market. Product governance is also weak, with a lack of disclosure and no formal policy on the issue in place. The 2025 cyber-attack raises some questions around data privacy.

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 LSEG. 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.

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