After years of false dawns, it appears British retailer Marks & Spencer (MKS) is finally regaining its mojo.

Shares believes this is a great time to invest in the retail bellwether, which could be in the foothills of an earnings upgrades cycle, with half-year results in November offering the next potential catalyst for the share price.

The FTSE 250 retailer’s shares jumped following its first positive unscheduled statement in years (20 Aug), which showed the turnaround under CEO Steve Rowe and chairman Archie Norman is delivering results.

However, the share price remains 75% below 2007’s 711p peak and could rally further as Marks & Spencer cashes in on pent-up consumer demand, thereby hopefully closing a valuation gap with clothing and homewares rival Next (NXT).

Besides being the UK’s number one clothing retailer by market share, Marks & Spencer is also a very successful food retailer whose attractions may even draw a takeover offer, with a bidding war underway for rival Morrisons (MRW), and Sainsbury’s (SBRY) is being talked about as a current target for private equity.

STRONG START

Fashion-to-foods purveyor Marks & Spencer has just reported a better-than-expected start to its new financial year and raised full year profit guidance. It flagged outperformance in food – where prospects have been transformed via its joint venture with Ocado (OCDO) – as well as a ‘good recovery’ in clothing and home sales, demonstrating that management’s comprehensive change programme is delivering results.

Albeit just five months into the financial year to March 2022, and with the caveat there are no further Covid-related trading restrictions, Marks & Spencer now expects adjusted pre-tax profit for the year to be above the upper end of previous £300 million to £350 million guidance.

Over the 19 weeks to 14 August, food sales were up 10.8% on last year’s lockdown-impacted period and 9.6% above the comparable period in pre-pandemic 2019/20. ‘Core categories and retail park locations have traded strongly,’ explained Marks & Spencer, which added that ‘hospitality and franchise are progressively improving, although remain below 2019/20 levels.’

Meanwhile, the clothing and home business which has long-dogged Marks & Spencer witnessed a good recovery in its performance, with sales coming in only 2.6% below the levels seen two years ago (pre-Covid) and 92.2% ahead of last year. Strong full price sales, reflecting more focused ranges, fewer promotions and a much smaller summer sale supported gross margins.

For once, Marks & Spencer is keeping up with fashion trends, with signs that it is placing less emphasis on suits as worker trends change and more on smart casual and athleisure.

Crucially, Marks & Spencer flagged significant progress with its online business, suggesting it can emulate omni-channel star turn Next, which is excellent at combining stores and online capacity to get consumers the products they want when they want them.

While Marks & Spencer’s in-store clothing and home sales have remained under pressure, online sales were ahead by an impressive 61.8% in the period. This demonstrates its ‘MS2’ plan, which is able to draw on the retailer’s customer data engine and relaunched and enlarged Sparks loyalty programme to create a powerful insight tool and more personalised relationships with customers, is having success.

Admittedly, the international business remains a rather mixed bag, though management insisted the push into global online remains promising with sales up roughly 40% on last year and more than doubling on the pre-pandemic comparable period in 2019/20.

THE SHORE CAPITAL VIEW

‘Increasing self-confidence is clearly evident across the M&S group,’ says broker Shore Capital following the update. It adds: ‘We see the growing potential for a sustained upgrade cycle as years of hard work, accelerated through the Covid crisis, begin to bear fruit.’

The broker’s upgraded forecasts for the year to March 2022 point to an adjusted pre-tax profit rebound from last year’s lockdown-impacted £41.6 million to £352.1 million, building to £392.5 million and £438.4 million in 2023 and 2024 respectively.

Shore Capital conceded its upgraded current year estimates could yet ‘prove cautious’ as we move through the year, though the brokerage also flagged the fact that Marks & Spencer faces growing pressure on costs and margins from well-documented disruption across global and domestic supply chains.

Based on Shore Capital’s earnings estimates, Marks & Spencer trades on a prospective price to earnings multiple of 11.2 for 2023, falling to just 10.1 for 2024. That looks great value and is a material discount to Next, which sells for 17 times estimates for the year to January 2022 and almost 15 times forecast January 2023 earnings according to Refinitiv.

As well as re-rating scope, income-seekers should note Shore Capital forecasts a return to dividends in fiscal 2023, meaning Marks & Spencer could soon offer a near-3% yield based on next year’s 5.3p dividend estimate.

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