A recent renaissance for Marks & Spencer shares came to an end this week as the retailer warned conditions on the high street would be even more challenging next year, with margins under pressure across the sector.
The stock – which had been up almost 20% in the past month as its transformation continued to take shape – slipped 2.4% to 114.3p on Wednesday.
Despite the gloomy outlook from M&S in its half-year results, the group said the far-reaching changes made over the past few years, including a reinvigorated product offer and value-for-money credentials, provided “some insulation from the gathering storm”.
CEO Stuart Machin added trading in the six months to 1 October had been “robust” as the food and clothing & home sides of the business grew ahead of the market.
Total revenues increased 8.5% to £5.5bn, with food sales growing 5.6% and 3% on a like-for-like basis, while sales at the previously troubled general merchandise rose 14%.
However, adjusted pre-tax profits declined 24% to £205.5m – with food profits down 42% – as M&S invested in pricing, absorbed higher costs, withdrew from Russia and saw the Ocado Retail online venture sink to a loss.
Peel Hunt downgraded the stock from ‘buy’ to ‘add’, lowering its target price by 55p to 120p.
Analyst Jonathan Pritchard said: “It has clearly been a very tricky period for the UK retailers, and whilst M&S has done a lot right, it could not push back the tide (and will not be able to).
“The shares have had a bit of a renaissance of late, but it is unlikely these downgrades are going to permit that to become an extended rally.”
AJ Bell investment director Russ Mould added M&S was in “a difficult spot” despite making a better fist of things of late.
“It doesn’t sit in the luxury space where the clientele is insulated from cost-of-living pressures, nor does it offer the kind of value on offer from discount chains and grocers,” he said. “Instead, Marks is wedged in a kind of squeezed middle and that’s reflected in both a big drop in underlying profit and a gloomy outlook.”
However, GlobalData analyst Joe Dawson argued the group’s strong commitment to value and quality would encourage consumers to invest, especially among gift buyers, safeguarding it from the price-led operators.
“M&S faces tough Q3 comparatives, but we expect it to be one of the stronger high street retailers this Christmas.
“The global rollout of its Sparks card, increasing the ‘Remarksable’ value range, and investing in multiple channels/customer touchpoints will also encourage loyalty. Looking forward to next year, profits will again be squeezed by sustained inflation, but M&S is well placed to weather the storm with a reliable customer base and a good reputation in existing markets.”
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