Marks & Spencers (LON:MKS), like many others, faced the consequences of the pandemic with higher restrictions and fiscally worried consumers and recorded a £17m pre tax loss in 2020.
However, M&S has since enjoyed a rebound in trading and has taken the opportunity to reshape the business and focus on online sales.
The company posted half-year reports last November in which they reported revenue growth of £1bn between 2021 and 2020.
The retail store saw a pre-tax profit of £269m compare to the loss of £17m in 2020. Operating profit for the group increased to £363m from £62m in 2020.
M&S Food sales grew by 10.4% in the half year which contributed to the strong operating profits. Their Christmas update suggests full year earnings could also reveal double digit growth in food.
However, the retailer continues to be dogged by a poor performing clothing business that drags on their overall profitability.
Marks & Spencer shares fell of a cliff following their update Christmas update as investors showed their disappointment around the minimal profit outlook increase.
Reshaping and Restructuring
The company underwent restructuring to curb the risks associated with the pandemic restrictions and improve efficiencies across the business. M&S focused on managing its working capital to create free cash flow and reduce net debt.
M&S saw a reduction in net debt from £3.8m to £3.2m in 2021.
The company’s strategy to increase growth in the business focussed on restructuring, improved product availability and creating strong trade partnerships.
The company opened 3 customer fulfilment centres with Ocado Retail which benefitted them by entering the online grocery market.
Improved Product Availability
Marks & Spencers’ Clothing and Home business helped operating profit with a 17.3% improvement in full-price sales. The company has grown its market share in both online and in-store channels with better-valued products. With improved products, the company has achieved higher retention rates among newer customers, thanks to the Sparks data and customisation programme.
The company had re-launched Jaeger, a digital brand, in October, which showed positive responses in the early stage from customers.
The company also received optimistic results from its store rotation program.
International trade has seen growth in online sales as well as in-store. The company managed to recover from the lockdown in markets like India along with restrictions on the EU border.
Over Christmas, Marks & Spencers reported growth in revenues across all segments, supporting the company’s statements regarding growth targets.
Going Forward
In their Christmas update M&S said their transformation strategy was well underway and pre-tax profit is expected to be £500m over 2022 FY.
The company has also seen a change in leadership to support the transformation.
Valuation
Marks and Spencer is trading at 7.7 times their earnings, the lowest amongst its peers, having sunk over 30% year-to-date.
A poor Christmas trading update, the resignation of their CEO and concerns around the Ocado joint venture have knocked shares.
With increasing fuel prices as a consequence of the war, the joint venture between Ocado and Marks & Spencers the profitability of the operation is at risk. Rising fuel prices are increasing overhead costs while consumers are moving back to retail shopping impacting the demand for online services.
Online has a been a focus for M&S and pressure on the Ocado joint venture will be a blow to the company.
However, with Marks & Spencer shares trading at such a low valuation, there is ample space to rebound back inline with their peers.