Marks & Spencer shares soar on surprise profit upgrade

British retailer says transformation programme 'on track', despite Covid challenges

Marks & Spencer said on Friday it had made a strong start to the financial year. Reuters

Shares in Britain’s Marks & Spencer (M&S) jumped on Friday as the retailer upgraded its profit outlook and said its transformation programme is “on track”.

The high street department store's shares surged as high as 12 per cent in morning trading, after the company said it had made a strong start to the financial year with a rise in demand for food and online clothes orders.

“Assuming no further Covid-related restrictions on trading, at this early stage we expect adjusted profit before tax for the year to be above the upper end of previous guidance of £300-350 million ($409-$477m)," M&S said in its unscheduled trading statement.

UK retailers, including M&S, were hit hard at the start of the pandemic when the country went into lockdown in March 2020 and non-essential stores closed, with further lockdowns also hampering demand.

The company suffered its first-ever, half-year pre-tax loss of £87.6m for the six months ended September 26 last year, as Covid-19 hit clothing and homeware sales.

In the subsequent Christmas quarter, the chain reported a sharp drop in clothing and homeware sales as renewed Covid-19 restrictions hit demand.

However, a drive to improve the quality of its products, as well as heavy investment in technology and e-commerce, saw the company’s clothing and home division revenue almost double in the 19 weeks to August 14 from a year earlier – just 2.6 per cent down compared to pre-pandemic levels over the same period in 2019.

Food revenue jumped 10.8 per cent on last year and 9.6 per cent on the year before that, with cost-cutting programmes helping to offset inflation and disruption in the supply chain from labour shortages.

Meanwhile, international revenue is up 39.7 per cent on last year and only 5.2 per cent lower than 2019 levels.

“Based on trading in the 19 weeks to 14 August 2021, M&S is today updating the market on the resulting improvement in its sales performance and profit delivery,” the company said.

“At the start of the year, continued restrictions across large parts of the M&S store portfolio meant that the trading outlook was highly uncertain. Since then, M&S has seen an encouraging performance providing confirmation that the transformation programme is on track.”

While the positive numbers indicate that the strategy was finally working, the company's bosses have been hinting for months that trading was improving, with its chairman and chief executive both saying that the pandemic masked the retailer's true performance.

M&S, renowned for providing the UK's socks, underwear and school uniforms, as well as upmarket food, has also reshaped its store estate and built a venture with online supermarket Ocado.

It has also added third-party clothing and footwear brands to its website, which has helped to boost traffic and placed many of its food products on the worldwide export platform British Corner Shop, a move the partnership believes will give overseas customers opportunities to enjoy a slice of home favourites.

The British Corner Shop homepage. Customers in 150 countries can now buy more than 800 different M&S staples, from Eccles Cakes to Luxury Gold Teabags. Courtesy British Corner Shop

Danni Hewson, financial analyst at AJ Bell, said the unscheduled upgrade to earnings from the company indicates “just how miserable its recent history has been that it represents the first unscheduled upgrade to earnings in years”.

“Investors have had to get used to a diet of disappointments from the retailer largely connected to its home and clothing arm,” she said.

“Until now Marks & Sparks has struggled to keep pace with the changes in shoppers’ appetites and the way they shop – increasingly over the internet as well as in store.”

While store sales for clothing and home were down almost 20 per cent on pre-pandemic numbers, its online sales were up 61.8 per cent.

“The pivot to online has continued with store sales down 19.8 per cent on 2019/20 as many locations remain in slow recovery from the pandemic, although retail parks have outperformed,” M&S said.

However, Ms Hewson said while the news is encouraging it is still “early days” for the turnaround programme led by chief executive Steve Rowe, who assumed the helm a little over five years ago.

“One swallow does not make a summer, with pandemic risks and supply chain issues still to contend with, but Marks & Spencer’s confidence in lifting guidance so early in its financial year is undoubtedly a positive sign,” Ms Hewson said.

M&S’s positive update is set against a more sombre outlook for Britain’s wider retail scene.

UK retail sales dropped unexpectedly in July, falling at the fastest pace since the economy was in lockdown in January, signalling that the recovery was losing momentum.

Retail sales volume dropped 2.5 per cent last month following a 0.2 per cent gain in June, according to the Office for National Statistics, as bad weather after the Euro 2020 football tournament kept shoppers away from high streets.