M&S back in fashion as shares double in value so far this year

Marks & Spencer (M&S) may have received mixed reviews for its Christmas ad this year featuring singer Sophie Ellis-Bextor and actress Hannah Waddingham, which saw an Elf on a Shelf get launched off a rooftop and unwritten cards get the full treatment of a blow torch.

But the clothes and food retailer couldn’t put a foot wrong as far as stock market investors were concerned.

Shares in the company have more than doubled in value so far this year, making it the second-best performing large company on the London Stock Exchange as it has found itself back in fashion with shoppers, investors and debt ratings agencies alike.

M&S – viewed by some analysts to have been in terminal decline when its shares lost three-quarters of their value between early 2015 and the end of last year – revealed last month that its pretax profit for the six months to September (the first half of its financial year) had jumped 75 per cent to £360.2 million (€420 million). The result was almost a third higher than what the market expected, as food sales jumped almost 15 per cent, and clothing and home revenues advanced nearly 6 per cent.

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The group, where Stuart Machin took over as chief executive in May last year, forecast that full-year profit would jump more than 30 per cent as efforts to improve the quality and value of its clothing and food and the appearance of stores bore fruit.

Having slashed its net debt pile – excluding lease liabilities – from £1.4 billion to €320 million since March 2020, when the Covid-19 pandemic struck, M&S has also restored dividend payments, albeit modestly, for the first time in four years.

The UK accounts for almost 85 per cent of group sales. The Irish business – which includes 16 traditional stores, three food halls and a fledgling food partnership with fuel retailer Applegreen, sits within the international division – posted almost €150 million of sales in the first half, equating to 2.4 per cent of the group total.

Clothing and home accounted for almost 60 per cent of earnings in the UK during the period. It’s a division that has worked hard to shed its dowdy image since M&S poached former Topshop fashion director Maddy Evans in 2019.

It gained a leading market share in womenswear in the UK during the summer for the first time in years – helped by dresses retailing at a magic price point of £39.50 going viral on TikTok and Instagram. It ended the period with a 9.5 per cent slice of the action in clothing and footwear.

The company now has an eyebrow-raising 18 per cent of the women’s jeans market – with its so-called Sienna Everyday jeans its best-selling item.

Still, Barclays analysts see obvious areas for M&S to target for further growth. While the group is a go-to for school uniforms in childrenswear – having cornered more than a fifth of the UK market – it seems few kids will be caught going around in its daywear.

Over in the men’s section, its share of socks and underwear sales is a multiple of that for casual tops and shoes.

In food, the 139-year-old company’s dine-at-home range has captured households as they look for an alternative to eating out or going to the pub amid the cost-of-living crisis. Still, M&S has only a 3.4 per cent share of the UK food retailers’ market.

The company’s purchase last year of its key logistics provider Gist in a deal worth up to £255 million, to secure control of its traditionally expensive food supply chain, is also paying off. Cost savings from the deal are running at an annualised £60 million. Analysts reckon there are more efficiencies to be scraped out as M&S and Gist take a proper look at the distribution network.

The benefits of M&S’s £750 million purchase in 2019 of a 50 per cent stake in online grocer Ocado – a deal that led to a 12 per cent drop in the retailer’s share price when first announced – have been less apparent.

The business still hasn’t added to M&S’s bottom line – even managing to lose money at the height of pandemic lockdowns, when online sales soared. Machin told analysts recently that he remains confident in the business, though it’ll be three years before it really starts to deliver.

The 105 per cent rally in M&S shares so far this year – a multiple of the 28 per cent gain posted by the wider European retail sector – saw the company rejoin the FTSE 100 index in London in September after a four-year hiatus.

Ratings agency Standard & Poor’s upgraded its view of M&S’s creditworthiness from “junk” to “investment grade” late last month, thanks to the group’s reduced borrowings and improved earnings.

The stellar performance of M&S – which is at the quality end of the high street – may be surprising at a time when the cost-of-living crisis is generally driving shoppers towards discounters like Lidl and Aldi.

Deutsche Bank analysts sounded a note of caution for European clothes retailers in a report published this week, saying a post-pandemic rebound in clothes sales should fade next year as the global economy remains weak and companies grapple with rising wage costs.

However, they highlighted M&S as one of their top picks in the sector for 2024, saying the group’s higher exposure to “older and wealthier” customers – whose savings are now benefiting from higher interest rates – should cushion it.

Machin will be glad of these, despite recent efforts to court a younger demographic.