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Profits have shrunk in Marks & Spencer’s food operation and its online joint venture with Ocado fell to a loss, with the group warning that market conditions would become even more challenging next year.
But CEO Stuart Machin said trading across the group had been “robust” in the first half as both the food and clothing & home sides of the business growing ahead of the market.
Revenues in the six months to 1 October increased 8.5% to £5.5bn but adjusted pre-tax profits declined 24% to £205.5m.
The shrinking bottom line was mainly driven by a 42% fall in adjusted operating profits in the food business, down from £124m a year ago to £71.8m, as M&S invested in keeping prices competitive and absorbed some input cost inflation rather than pass the full effect on to customers.
Costs in the food operation jumped 8.4% year on year, further squeezing margins, but M&S said the acquisition of logistics provider Gist should help to alleviate pressures going forward.
However, M&S said the food business outperformed the market in terms of value and volume, with sales growing 5.6% in the half and 3% on a like-for-like basis. Excluding strong growth in hospitality and franchise sales, growth reduced to 1.9% but remained “substantially” ahead of pre-Covid levels.
Online food sales declined 4.2%, with revenues, excluding VAT, at Ocado Retail totalling £1.1bn in the half as digital demand cooled from the heights of the pandemic. It pushed the joint venture to a loss of £700k, compared with a £28.1m profit a year ago. M&S expected Ocado Retail to remain lossmaking for the full year.
Despite the decline in revenue, M&S added that customer growth at Ocado Retail was strong at 17%, with average orders per week growing 5% as customers reverted to smaller baskets and sought greater value in response to inflationary pressures.
Clothing & Home sales rose 14% in the half, with store sales up 18.8% and online 4.9% higher, while adjusted profits at the division increased 33% to £171.4m.
“Trading in the first half has been robust with both businesses growing ahead of the market, reflecting the beginnings of a reshaped M&S,” Machin said.
“In food, investment in trusted value has driven top-line growth but short-term profit has been reduced, although the acquisition of Gist gives us control of one of our biggest cost and efficiency levers. At Ocado Retail, the customer proposition is being re-energised under new leadership.”
He added: “Underpinning our business is an improved balance sheet with reduced debt and a strong cash position.
“This progress means we face into the current market headwinds with an increased resilience and level of confidence. Looking beyond the current stormy weather, much is in our control and our mandate is clear - to step up the pace, accelerate change, drive a simpler, leaner business and invest in growth opportunities to build a reshaped M&S.”
Trading in the first four weeks of the second half was in line with forecasts, with food sales up 3% and clothing & home up 4.2%.
The group said it was “set up well” for the peak trading period over Christmans, with “improved ranges, a strong pipeline of new product and improved value positioning in both businesses”.
However, looking ahead to the the 2023/24 financial year, M&S warned of a “more challenging” market as the cost-of-living squeeze and input cost inflation created pressure on margins industry-wide.
“All parts of the retail sector will be affected, and this will result in unviable capacity leaving the industry, creating opportunities for the leaner players who remain.
“We believe that the M&S positioning and the accelerated change underway, give scope for greater resilience and we are very confident the business will emerge with a strengthened market position and prospects for growth.”
Morning update
The FTSE 100 started the day down 0.4% to 7,274.86pts.
Shares in M&S fell 3.1% to 113.5p as it warned of more challenging conditions ahead for the retail sector.
Early risers included Science in Sport, up 6.7% to 16p, Virgin Wines UK, up another 5.1% to 72p, Bakkavor, up 4.4% to 95p, and Naked Wines, up 3.5% to 112.1p.
WH Smith and Cranswick were both early fallers, down 1.6% to 1,287p and 1.6% to 2,946p respectively.
Yesterday in the City
The FTSE 100 scrapped its way to a 0.1% rise to 7,309.15pts yesterday.
Primark owner Associated British Foods managed a 2.1% increase to 1,459p after it announced a £500m share buyback and bigger dividend in annual results.
Drinks bottle Coca-Cola HBC jumped 3.2% to 1,987.5p after it upgraded profit expectations amid better-than-expected trading.
Conversely, Hilton Food Group sank 14.8% to 540.1p following a profits warning as it made slower-than-anticpiated progress passing on costs in the UK fish business to customers.
Other risers yesterday included Virgin Wines UK, up 9.2% to 65.5p following a bullish note from Liberum, THG, up another 8.8% to 70p, Science in Sport, up 6.7% to 16p, and B&M European Value Retail, up 4.3% to 372.2p.
Aside from Hilton, fallers included Finsbury Food Group, down 1% to 90.1p, Cranswick, down 1.5% to 2,998p, and Deliveroo, down 1.5% to 93.4p.
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