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No sparkle for M&S share price, as outlook dimmed by higher costs

M&S share price: A Marks & Spencer store sign

It’s not been a good start to the year for the Marks & Spencer share price, which is down over 35% year-to-date, after hitting 21-month highs in January.

M&S share price down 50% since January high

Since those January peaks of 262p, the shares have halved in value, finding support at last July’s lows at 129.70p. Even with the challenges facing the retail sector here in the UK, as well as the US, this seems somewhat of an overreaction, for a business that looks set to close out a decent annual performance, with its deal with Ocado being central to the turnaround in its fortunes.

When M&S reported in January, not only was its food division performing well, with a 10% rise in food sales, but its general merchandise division saw clothing and home sales increase by 3.2%. It seems likely that allowing boutique third-party retailers like Fat Face and White Stuff to offer their products online under the 'Brands' section has helped improve the general rate of turnover through  digital channels.

Annual profits and revenue beat expectations

Of course, the outlook has darkened considerably since then, but the expectation for today’s numbers was for annual profit-before-tax of at least £500m. On the headline numbers, M&S has beaten expectations, posting full-year annual profit-before-tax of £522.9m, on revenue of £10.89bn, a 6.9% rise on pre-pandemic levels. Profit-afte- tax came in at £309m, well above the levels in 2020 when they were £27.4m. However, even allowing for a good set of results, today is all about the outlook.

One of M&S's core strengths has been its food business, and this performed well with a 10.1% rise in sales. Clothing and home also played its part, seeing sales rise by 3.8%, with the online side of the business contributing growth of 55.6%, while store sales were lower by 11.2%, although the closure of a net 55 stores has played a part in that, while debt levels have been reduced to £420m, excluding lease obligations. Online clothing sales have been helped by the brands platform, which includes the likes of Jaeger, White Stuff and Fat Face.

Difficult period ahead as M&S reveals CEO change

In terms of the outlook, M&S have said that the first six weeks of trading have been ahead of the same period a year ago, when the shops were reopening after the lockdown at the start of last year. For the rest of the year the outlook looks more challenging, which isn’t a surprise given that in March, M&S chairman Archie Norman warned that even with being partially hedged on energy costs, prices of food and clothing were likely to increase sharply in the coming months, due to higher freight, container, and wages costs.

Without the buffer of business rates relief gone, and with no profit contribution from the Russia business, which is franchised out to a Turkish company, management have said that the upcoming year will see a lower adjusted profit base, and that consequently profits will be lower, due to higher costs and capex spending. M&S have also taken a £31m charge in respect of the Russia business.

As part of the transformation plan, M&S have said they will also be spending more on capex, rising to £400m, up from £300m, as it looks to streamline and improve its logistics and supply chain processes. This will be overseen by the new management team of Stuart Machin and Katie Bickerstaffe, after it was announced that CEO Steve Rowe would be stepping down, to be replaced by chief operating officer and managing director of food, Stuart Machin, on 25 May. Machin is also a director of Ocado Retail. Katie Bickerstaffe will become co-CEO with a focus on the digital and data future of the business, as well as retaining her remit of clothing and home.

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