"Embarrassingly good": Analysts react to Marks & Spencer's H1 sales and profits surge

Retail analysts were left a little red-faced this morning as Marks & Spencer defied their optimistic profit forecasts to deliver a far better than expected pre-tax profit of £325.6 million for the six months to 30 September. This was up 56.2% on the same period last year. Analysts had been expecting a figure of around £276 million with the team at Peel Hunt were forced to admit the results were "embarrassingly good".

Meanwhile revenues increased by 10.8% to £6.13 billion for the period, boosted in particular by an impressive 14.7% rise in food sales with Clothing & Home (so long the problem child) up 5.7%. Its shareholders were rewarded with their first dividend since the Covid-19 pandemic and shares closed the day up more than 8% at 244.1p.

The retailer's comprehensive turnaround plan, led by CEO Stuart Machin, is clearly bearing fruit. Older stores have been closed with cold-eyed logic while bigger, more modern stores are being opened up and down the country. Nine new stores are expected in November alone, including a new 65,000 sq ft store in Birmingham. It has also been investing heavily in technology and making improvements in logistics, as well as cutting unnecessary costs.

Stuart Machin

Its food has left rival Waitrose in the share, while it appears (finally) to have got its fashion mojo back. But Machin, who must be heading into the festive season as one of the most confident CEOs on the high street, is at pains to point out that the market will remain tough. However, he says, the retailer will keep on pushing forward. “There will be challenges and headwinds in the year ahead, and progress won’t be linear, but we are ambitious for future growth and are driving what is in our control," he said this morning.

Here's how leading analysts reacted.

Peel Hunt Retail Team

"The extent to which M&S has beaten consensus in 1H is a little embarrassing for the analytical community. Food continued 1Q’s good work and remained firmly double digit LFL in 2Q. That will be most inflation but there is some volume in there and plenty of market share gain as the value for money improvement bears fruit. GIST brought £30m of cost savings and the margin has hit long term targets already.

I"n Clothing & Home the weather did cause 2Q LFL to slow to MSD [mid single digits] but the gross and EBIT margins here were very strong (good full price sell-through) so profit delivery was impressive. International and Ocado were in line with expectations but the strength in the core meant that the Interims were the stuff of dreams; the dividend was the cherry on the icing on the cake.

"From a position of relative strength management is doing the right thing in reinvesting into tech and service, in our view. We already assume that we will not see such stellar LFL in 2H and the extra £20m of cost reinvestment means that the market may actually downgrade 2H, and yet upgrade the FY by £80m from £560m to £640m. The whisper range for the FY may have been around £600m but it surely was not this high.

Marks & Spencer is making strong steps towards a full recovery. The food offer is as good as it has ever been and the Clothing & Home ranges are improving but not quite there yet. The cost saving programme has underpinned the strong profit growth and International could be interesting in time. The shares have had a good run but they do not reflect the true medium-term potential here, which is for an EPS [earnings per share] number well into the 30’s. On that basis our target price could even be conservative; it is certainly realistic, in our view. Marks & Spencer is right at the top of our Buy list."

Charlie Huggins, Manager of the Quality Shares Portfolio at Wealth Club, commented:

"In a difficult trading environment M&S has delivered excellent results, with notable progress in Food and Clothing and Home, and both businesses outperforming the market. With momentum having continued into October, the turnaround plan to revitalise the brand and reignite growth is well on track and the group can look forward to the Christmas period with confidence.

"The Clothing & Home division has been a problem child for M&S for many years. The new strategy, launched last year, aims to improve brand perception and designs, reduce discounting and improve the online offering, while taking a knife to costs and instilling a more entrepreneurial culture. Early signs are this plan is resonating with consumers.

"However, pressure on the UK consumer could intensify heading into 2024 as the impact of higher interest rates really starts to bite. This, combined with tougher comparatives means M&S is striking a tone of caution looking ahead to the second half. This may disappoint investors.

"Overall, M&S is delivering strongly on the things it can control and seems to be in a much better place now than it was a few years ago. However, it isn't fully in charge of its own destiny and is heavily dependent on consumer confidence, where uncertainties still abound."

John Choong, Senior Equity Research Analyst at Investing Reviews

"M&S continues to sparkle brightly, scoring top marks with its latest interim numbers. Like its bigger peers in the food space, M&S's food division also witnessed astounding growth of 14.7% as the grocer continues to outperform the industry thanks to its remarkable and, for many, comforting food offerings.

"Its Clothing & Home (C&H) segment didn't disappoint either, with 5.7% growth showing that the bad weather over the summer didn't do much to dampen sales.

"Investors will also be glad to see operating margins improve as the retailer is beginning to reap the benefits of vertically integrating its supply chain. Its acquisition of Gist along with lower wholesale food and commodity costs led to a massive 75% growth in its adjusted pre-tax profits.

"However, the board expects profits to being weighed towards the first half as the operating environment remains uncertain. But it's worth considering that M&S's approach over the past year has been to underpromise and overdeliver.

"With the opening of more stores before the holiday season and wage growth now trending above inflation, investors should be confident that the newly-inducted FTSE 100 stalwart's strong momentum should be sufficient to enjoy a delightful Christmas and see respectable sales growth in H2.

"Chief executive Stuart Machin says "we're only just beginning" and it certainly feels like M&S is on the right trajectory."