Marks & Spencer Group PLC (LON:MKS) said that trading for the first six weeks of the new financial year has been ahead of the same period two years ago and of guidance, though it posted a full-year loss.
Store sales in the Food business showed strong growth although hospitality and franchise remain adversely affected, with Clothing & Home sales growing since reopening and online remaining robust. International sales continue to be impacted by ongoing restrictions, particularly in India.
The FTSE 250 group said this performance is encouraging but it is unclear how the recovery will develop and if consumer activity will sustain in Clothing & Home.
Brexit remains also a headwind for its high costs, mostly due to admin on exports of food, particularly to the island of Ireland. This includes additional supply chain costs at Motherwell and Faversham depots, as well as costs of a digital track and trace platform, additional variable cost per tray, veterinary certification, and costs of change. Potential tariffs relate to duty on exports of Clothing & Home and elements of the Food catalogue into the EU.
COVID-19 costs are expected to dwindle down, offsetting an increase in base pay rates, costs related to transformation and higher variable costs such as online fulfilment.
In the medium term, M&S said it is positioned to expand further in convenience, build sales through larger renewed stores and progressively improve profitability, while Ocado will increase capacity by 50%.
The grocer is also targeting over 40% of Clothing & Home revenue online in three years, with an overall operating margin ahead of 2019/20 levels.
In the year to 27 March, revenue was down by a tenth to £8.9bn, with Food up 1% and Clothing & Home down 31%.
The group bagged a net profit of £78mln from the Ocado joint venture, though it swung to a £202mln loss before tax from a £67mln profit a year ago.
Net debt was £3.5bn from £3.9bn in 2020 and a dividend was not declared.
Peel Hunt raised the target price from 120p to 150p and noted that the work done on pricing perception in the food segment is delivering results.
“To say all the challenges are over would be a gross misstatement. The picture for Clothing & Home remains very tricky,” analysts at Hargreaves Lansdown noted.
“The work being done to streamline the store estate and drag more of the business online must be applauded, but it’s too early to call if these gargantuan efforts have simply come too late. A restructuring effort this intense comes with huge risk, and there’s a chance the profit and cash outflows that come with it stretch further into the future than M&S is planning for.”
Shares rose 4% to 162.92p on Wednesday morning.
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