Robust results from M&S, but warning that next 18 months will be tough

Online sales at M&S rose 5% in the first half of 2022, despite in-store sales rising 18% as its restructuring programme starts to bear fruit. Sales of third-party goods online has more than doubled.

Reporting robust interim H1 results, the retailer has seen food sales also grow 5.6%, along with clothing and home rising 14%.

However, profits overall were down 24%, pulled back by the food business, which has borne the brunt of trying to maintain competitive pricing by not passing on inflationary cost rises to customers. 

The company warns that it expects a material contraction in the next 18 months. Chief executive Stuart Machin saying that he expects market conditions to become more challenging in the 2023/24 fiscal year. 

“Across all M&S markets it is highly likely that conditions will become more challenging in FY24. However, the far-reaching changes made over the past few years, together with a reinvigorated product offer and strong value for money credentials provide some insulation from the gathering storm. In addition, the M&S customer base has slightly advantaged demographics,” he says.

Machin adds: “Under new leadership, steps are now being taken to accelerate migration into growth channels – online and high performing modern stores – whilst at the same time bringing forward plans to streamline the business and reduce costs. The combination of technology-driven efficiency gains, structural cost reduction, supply chain efficiency and simplification is targeted to deliver over c.£150m of cost savings in 2023/24.”

During the past three years M&S has invested substantially in developing its ability to interact with customers seamlessly online and in store and enabling them to have product delivered or returned through multiple different channels. 

“We have created a customer data engine containing a significant volume of data and attributes relating to our customer base, quadrupled the number of active app users to 4 million, relaunched and grown the Sparks loyalty programme to c.16m members and invested in developing data science capabilities across M&S.,” says Machin.

Food for thought

M&S Food outperformed the market on both value and volume, but operating profit declined. The retailer delivered resilient sales growth of 5.6%, with LFL sales growth of 3.0%, in a period of market-wide cost and price pressure. The business generated particularly strong growth in hospitality and franchise sales compared with last year. Sales excluding these areas grew 1.9% but remain substantially ahead of pre- Covid levels in line with its strategy to broaden the reach of the business. 

Operating profit before adjusting items was £71.8m, compared to £124.0m in 2021/22 excluding £19.7m of business rates relief received in the prior period. The combination of investment in value and a first half weighted increase in operating costs led to the reduction in margin to 2.2%, although this improved through the period (Q1 2.0%, Q2 2.4%). 

Clothing and home

Clothing & Home delivered strong growth with total sales up 14.0% and LFL sales up 13.7%. Full price sales participation was broadly level on last year and well above the historic average. 

Market share increased 50bps to 9.1%, according to Kantar in the 24 weeks ended 22nd September, and M&S generated growth across categories and channels. 

Store sales were up 18.8% with growth driven by stores in city centres and shopping centres reflecting a return to more normal trading patterns, says the company, although high streets continued to lag. 

Online sales increased 4.9% and were 32% of total Clothing & Home sales, with continued strong growth in traffic and increased average order values, partly offset by higher returns rates. 

Ocado declines

Ocado Retail revenue, however, declined 4.2% and the contribution to group share of net loss was negligible at £(0.7)m. During the pandemic, Ocado Retail experienced very strong trading conditions, which translated into a strong profit performance. The business is now operating under a new leadership team focused on restoring the core of the customer proposition, says Machin.

Initial steps include the relaunch of the group’s platform and front- end website later this year and improved collaboration with M&S Food to make more of the combined offer. 

Commenting on the results, Neil Shah, Executive Director, Content & Strategy at Edison Group says: “Looking ahead, M&S is confident moving into its traditionally strongest quarter, with sales across Clothing & Home, Food and International all up. However, like many retailers, the macroeconomic backdrop of the conflict in Russia and rising inflation rates remain a concern. With families in the UK continuing to feel the pressure of rising costs, M&S will look to capitalise on its value ranges to attract a wider customer base. Investors will be encouraged that the business has identified more than £150m of cost savings for the financial year ahead, with a focus on the efficiency of its retail operations and supply chain, and an investment in technology to improve the customer experience. With the World Cup and Christmas quickly approaching, M&S will hope that its ranges for these events will offset the unseasonably warm weather which has delayed the change to winter buying.”

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