UK supermarket Marks and Spencer LON:MKS looks like it could be about to turn the ship around on the back of some good results. It surprised the market on Wednesday with sales reported up 9.9% to almost £12bn.
Marks and Spencer has been struggling to compete with the big four supermarkets, as shoppers attempt to limit their grocery spending and opt for more affordable food items. This is translating into less frequent, smaller shopping trips. M&S also lacks the physical retail space to compete in terms of the product variety bargain hunters treasure. That is why the numbers looked so surprising.
Shares in Marks and Spencer were up 12% in early trading on Wednesday as the market revised expectations. The company even said that it would reintroduce a modest dividend from November. It had previously suspended payments at the start of the pandemic.
- Share Tip: Household products specialist poised for further upside
- What are the UK’s top consumer staples shares in Q3?
- Look to the US for your next ‘ten bagger’ says broker
“In a difficult trading environment M&S has delivered solid results, with notable progress in Clothing and Home,” observed Charlie Huggins, Managing Director at the Wealth Club. “With the new year having got off to a good start and plans to reinstate dividends, the turnaround plan to revitalise the brand and reignite growth appears on track.”
- Stock recommendations by Bridgewise. Try a free trial of Data+ for a deeper look.
The Clothing and Home division has been a problem child for Marks and Spencer for many years. The new strategy, launched last year, aims to improve brand perception and designs, reduce discounting and improve the online offering, while taking a knife to costs and instilling a more entrepreneurial culture. Early signs are this plan is resonating with consumers with Marks and Spencer increasing its market share in clothing and footwear during the year.
Some analysts feel that M&S is still facing some structural issues which investors should not ignore.
“M&S sales growth is overshadowed by margin decline,” said Orwa Mohamed, an analyst at Third Bridge. “Our experts say they face significant challenges in cost inflation, lack of customer loyalty, and product range. M&S may encounter greater difficulty in passing on cost increases compared to other grocers because there is already a perception that they have the second most expensive products after Waitrose.”
Mohamed said that after multiple rebrands, Marks and Spencer still finds itself with customer loyalty currently at an all-time low.
Third Bridge said that experts in the market say Marks and Spencer’s plan to open 30 new stores might require reconsideration, as the chosen locations don’t appear to be optimal for food sales. Targeting mid-town or retail park markets would be a more suitable approach.Marks and Spencer’s partnership with Ocado LON:OCDO was established to address their lack of infrastructure and expertise in online retail. This collaboration is now underperforming and primarily focused on the southern region, presenting a strategic challenge for Marks and Spencer.
It is too early for Marks and Spencer to declare victory. Shareholders are all too aware that one swallow doesn’t make a summer.
Marks and Spencer needs to sustain growth in sales and get margins moving in the right direction,” said Huggins at the Wealth Club. “This will be difficult given a backdrop of intense cost pressures. Nevertheless, there are more reasons for optimism now than there have been for some time.”
