Marks & Spencer Earnings: Solid Top and Bottom-Line Momentum Continues With Food Leading the Way

Marks & Spencer reported another robust set of results in its fiscal 2024 half-year. Group sales were up 10.8% driven once again by food sales, which were up 14.7% (like-for-like sales up 11.7%), driving volume and market share gains against mainline grocers. The clothing and home division grew by 5.7% (like-for-like sales up 5.5%) with resilient full-price sales and the click-and-collect channel (reduced fulfillment costs) contributing to improved profitability. International and Ocado Retail sales were up 3.9% and 6.9%, respectively. On profitability, the adjusted operating margin recovered to 4.3% from 2.2% last year in food, driven by volume growth and manufacturing efficiencies. Margins in clothing and home also recovered to 12.1% from 9.8% last year, supported by a higher proportion of full-price sales (82%), cost-savings in the logistics network, and lower freight rates than anticipated. Management remains cautious about its outlook and said it expects profit before tax and adjusting items to be weighted toward the first half. Profit-before-tax and adjusting items were ahead at GBP 360.2 million versus GBP 205.5 million last year. Marks & Spencer's share of Ocado Retail's net income-to-group results was negative GBP 23.4 million due to the continued effect of costs related to new and excess capacity. Given the widespread improvement in operating performance across the business and a stronger balance sheet, and as previously announced, the firm is restoring a modest annual dividend to shareholders (GBX 1 per share). We don't expect to change our GBX 185 fair value estimate for Marks & Spencer after accounting for these results. Given the strong beat in top-line growth and profits, shares were up as high as 9% intraday, pushing the stock further into 2-star territory.