It’s not been a great year for the Marks & Spencer share price, which is down over 50% year to date, and over 20% lower from the levels in August.
While most of the headlines are likely to be around the fact the company has slipped to a loss, the outlook for the business does seem a little brighter, with the Ocado deal a decent foundation for a recovery.
The long decline of the M&S share price
When M&S last reported, back in August, the numbers for Q1 were slightly better than expected, however that wasn’t enough to stem a long decline in the M&S share price. It hasn’t always been like this, however multiple turnaround plans have been unable to arrest a decline that in this instance, first started all the way back in the middle of 2015.
Food revenue rises
Total food sales in the quarter to August saw a rise of 2.5%, and with the deal with Ocado up and running since September, hopes are high that in this particular area M&S is set to outperform, especially since Ocado cited its recent deal with M&S as a major reason behind its upgraded EBITDA forecast from £40m to £60m.
Food has always been a strong area for M&S, and with the pandemic helping to drive sales it would have been disappointing, if the benefits of the Ocado deal weren’t being reflected in this area. This morning’s H1 numbers do reflect that with a 47.9% increase in Ocado revenue, which contributed to a share of net profit of £38.8m. This outperformance has helped reduce today’s first half loss to a more modest £17.4m, a much better outcome than the £60m loss which was expected.
Ocado deal offsets pandemic pain
Where Marks & Spencer has traditionally struggled in recent years has been in the area of general merchandise and home, which have been a serial area of underperformance in terms or product, as well as online experience. The deal with Ocado for the moment only covers a limited 700 home and lifestyle product lines, compared to 4,400 food lines, and this has been reflected in the general merchandise numbers where we’ve seen revenues decline 61.5% in Q1, and 21.3% in Q2.
In the round group revenues came in at £4.1bn, a decline of 15.8% from a year ago, but still above market expectations, largely due to the boost represented by the Ocado deal.
This year’s pandemic hasn’t helped the cause, in turning the overall retail business around and this is borne out in the general retail numbers, however online sales have been a strong area rising 34.3%, helping offset some of the pandemic pain.
To be fair to M&S management, they aren’t unique in this regard, as all general retailers have struggled, and while todays first ever loss in the company’s history is disappointing, it could well have been a lot worse.
Net debt has come down by 5.6%, while free cash flow has improved substantially to £77.6m
Second lockdown brings further problems
Even with today’s numbers, this month’s lockdown until December is yet another headwind for the sector, with no guarantee that physical stores will be able to reopen to take advantage of a pre-Christmas rush.
Management have recognised this in the outlook, guiding expectations around clothing lower, while allowing stock levels to fall by more than £100m on last year.