M&S (LSE:MKS) produced a tasty set of results today. M&S’s food offering continues to deliver for the group and some analysts reckon it could be their secret weapon against the inflationary pressure set to rattle other supermarkets. Full year underlying sales rose 6.9% compared to pre-Covid levels to £10.9bn. This reflected strong growth in UK Food as well as growth in UK Clothing & Home at the company.
Operating profit rose by £20m to £709.0m compared to 2020, as double-digit increases in UK Food and UK Clothing & Home offset weakness in International and MS Bank and Services.
Any risks expected from M&S?
M&S expects that inflationary headwinds will negatively impact volumes and drive sales growth lower through the end of the year. So far this year trading has been ahead of comparable periods, but this is expected to worsen as the year progresses. Still, the group plans to increase investment, spending around £400m this year on things like digitization and supply chain efficiency.
Shares were broadly flat following the announcement. While the company is back in the black, the share price looks less than impressive, down from almost 250p six months ago. The stock has been coughing up value pretty consistently.M&S’s premium brand positioning means they are less vulnerable to the pressure from discounters and many of the shoppers they do lose will be replaced by new customers trading down from eating out. Also, the old habits of splitting grocery shopping between multiple supermarkets are back, now the need to do one big weekly shop and return home has dissipated with Covid.
“As M&S continues its transformation programme, benefits are expected to continue to flow to shareholders,” noted Ross Hindle, analyst at Third Bridge. “However, one concern does remain around M&S’s clothing range which once again finds itself in no-mans land between affordable and premium clothing.”
What about the year ahead?
Management at M&S echoes the City’s concerns around inflation and its impact on the UK consumer’s buying behaviour. As such, the next 12 months will prove challenging for all retailers as they battle market share with margin.
“Marks & Spencer’s done a good job navigating a large transition amid the backdrop of the pandemic,” said Laura Hoy, an equity analyst at Hargreaves Lansdown. “Results show the group’s efforts to trim costs and focus on digitization are paying off even as shopping habits return to normal. This is most evident in clothing and home, where digital sales are driving growth and app usage has been improving progressively. This was a welcome tailwind given the group suffered from a £5.2m ding to profits due to its exit from Russia.”
However, Marks management struck a cautious tone in its guidance for the upcoming year, saying that although its trading beyond pre-pandemic levels at present, this is unlikely to continue. Customers are seeing their incomes stretched by rising inflation and that’s likely to weigh on sales growth moving forward.
“Unlike some of its discount peers, Marks’ position as a premium food brand could serve it well through this period of inflation. The group’s shored up its value proposition and that should continue to attract higher income shoppers,” Hoy added.
Despite the business starting to fire on more than one cylinder, a pessimistic outlook is hardly helping drive investors to pick up shares. According to the company: “There is substantial inflation in both cost of goods sold and operating costs including fuel, power, building materials and maintenance … Consequently, customers’ spending capacity is under pressure. We expect these pressures to increase as the year progresses. We are therefore planning for an adverse impact on volumes due to price inflation, slowing the rate of sales growth.”
