The market likes today’s (22 May) full-year results report from Marks and Spencer (LSE: MKS) and the share price is soaring. As I type, it’s up almost 10%.
However, judging by the strength of the figures and the tone of the outlook comments, this could be near the beginning of the company’s turnaround and growth story.
Multi-year operational progress
The stock’s rise today is part of a run that started last autumn. It seems investors could no longer ignore the accelerating turnaround in the underlying business.
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The numbers are impressive. In the trading year to 30 March, revenue rose by more than 9% and adjusted earnings shot up by just over 45%.
Chief executive Stuart Machin was upbeat in the report. For two years, the company has been pursuing a plan to reshape the business for growth. Now, the directors “can see the beginnings of a new M&S”.
The food, clothing and home categories all grew by volume and value share “ahead of the market”.
Machin said both the online and store businesses have delivered 12 consecutive quarters of sales growth. The trading momentum gives the directors “confidence” the plan’s working.
Confidence is a word I like from directors. It’s carries so much more conviction than the often-used ‘convinced’, for example!
The company’s prior investment into store rotation and the end-to-end supply chain is beginning to pay off, Machin said. New stores and renewals are “performing ahead of forecast.” Meanwhile, profit margins have been increasing because of supply chain modernisation.
An optimistic outlook
Looking ahead, Machin emphasised the company’s “clear plan [and] vision for the future,” insisting there is “so much” opportunity ahead.
Meanwhile, City analysts have pencilled in an increase in earnings of just over 8% for the current trading year to March 2025. They also expect the company to continue rebuilding its shareholder dividend with a payment of about 6.2p per share.
With the share price near 298p, the forward-looking price-to-earnings (P/E) multiple is just below 12 when set against those estimates, and the anticipated dividend yield is around 2%.
That compares to the P/E of the FTSE 100 index near 14.5 and its yield of about 3.3%. So at first glance, the M&S valuation still isn’t excessive.
With all this good news under its belt, Marks and Spencer looks like a ’safer’ investment now than it did last autumn. However, ‘safe’ often means lower or slower returns for new shareholders.
Steady performance ahead?
The ship looks steady, but even now there’s much that could go wrong. The company operates in a cyclical sector. Any new downturn in the economy could pull the rug from under future trading figures.
The retail industry is also competitive, and new or rejuvenated existing players may eat into the firm’s market share in the future.
On top of that, the business still carries a big chunk of debt – I’d like to see that reduce more in the coming years.
Nevertheless, on balance, I’d consider the stock for inclusion in a diversified portfolio now with an expectation of steady performance in the coming years.
