M&S first half results: the good, the bad and the ugly

Marks & Spencer is expected to report a mixed bag of results this week as its grocery business takes off with Ocado but its store and clothing sales continue to suffer during the pandemic.

  • Marks & Spencer (M&S) is expected to report a set of mixed results this week
  • The good news is that its new grocery tie-up with Ocado is gaining momentum
  • The bad news is that the coronavirus pandemic is still hurting sales in store and weighing on clothing and homeware revenue
  • The ugly result will be the first-ever loss for M&S as a public company as it continues to try and turn its fortunes around
  • M&S shares are down 58% since the start of the year, significantly underperforming the FTSE 250, but brokers are bullish on the stock and think it is undervalued

When will M&S release its interim results?

M&S will release its first-half (H1) results on the morning of 4 November. This will cover the six months to 26 September.

M&S earnings preview: what to expect

The coronavirus pandemic has meant this year has been tough for the majority of businesses. That is particularly true for M&S, which was already in trouble before the pandemic and in the middle of its latest turnaround programme to revive the company’s fortunes. M&S is expected to report a mixed bag of results this week, giving investors a reason to be both optimistic and cautious about the stock’s prospects.

The good…

The positive news is most likely to come from the company’s new online grocery business with Ocado, which has gained significant momentum since being launched at the start of September, when M&S took a 50% share of the venture and replaced Waitrose as Ocado’s partner.

Ocado said in mid-September that the grocery venture had seen revenue rise 52% in the 13 weeks to the end of August, significantly accelerating from when it was working with Waitrose. The change to M&S has been well received by customers, which have ordered more M&S goods and larger baskets than when Ocado was working with Waitrose.

Ahead of the M&S results this week, Ocado provided further good news by stating the grocery venture is now expected to report annual Earnings before interest, tax, depreciation and amortisation (Ebitda) of ‘over’ £60 million – a stark rise from just over £35 million the year before and much higher than the previous target of just £40 million.

The fact the country is entering another national lockdown bodes well for Ocado and M&S and should continue to encourage people to buy groceries online.

The bad….

The problem specifically for M&S is that it still sells food, as well as clothing and homewares, in its stores that have had to deal with haphazard approach to lockdowns in the UK this year. This means that, although its online business with Ocado will report strong growth, M&S’s share of the spoils will be offset by lacklustre demand in its stores. This, according to analysts, will mean M&S’s food revenue will be broadly flat from the year before – although the latest update from Ocado on Monday suggests M&S could deliver a better performance than this currently suggests.

Still, stores remain a burden for M&S right now. It has already revealed that stores in city centres and in transport hubs have suffered this year as people work from home, while sales in suburban locations have performed better. Still, the decimation of the high street means analysts are forecasting a 44% slump in clothing and homeware sales during H1, which will further weigh on its overall results.

The ugly

The ugly result of all of this is that M&S is expected to report a loss for the first time since going public in 1926. This will be what grabs the headlines on the day and is likely to overshadow everything else.

Adding to the strain being placed on the bottom line is the cost of reshaping the business for the digital age. This predominantly involves cutting 7000 jobs – including central support staff, regional managers and UK store employees – in just three months. The cost of the redundancies will be reflected in the interim results this week, with M&S to take a one-off hit with the aim of reaping the cost savings over the long term.

M&S earnings consensus: what does the City expect?

M&S is expected to report an 18% decline in revenue in H1 of the financial year to £3.99 billion from the £4.86 billion reported the year before, according to a consensus compiled by Reuters. This is expected to push M&S to a loss, with analysts forecasting an adjusted loss per share of 4.9 pence compared to a 7.1p profit the year before.

Importantly, the consensus does not take the news released by Ocado on Monday, revealing that earnings from the online grocery venture will be considerably higher than previously thought. This raises the chances that M&S will beat expectations this week – just like it did with its last set of results.

M&S earnings consensus H1 2020 result H1 2021 estimate
Revenue £4.86 billion £3.99 billion
Adjusted earnings per share (EPS) 7.1p (4.9p)

(Source: Reuters)

M&S shares: broker recommendations

M&S shares have lost more than 58% value since the start of the year – underperforming the 22% fall in the FTSE 250 that it joined last year when it lost its place in the FTSE 100.

On average, brokers are bullish on M&S and believe the company is undervalued. The 21 brokers covering the stock have an average Buy rating on the stock and an average target price of 126.12p, implying there is as much as 38% upside to the current share price.

Recommendation Number of brokers
Strong Buy 5
Buy 7
Hold 7
Sell 2
Strong Sell 0
Average rating Buy
Average target price 126.12p

(Source: Reuters)

How to trade the M&S results

Results are always a trigger moment for shares, and it will be no different for M&S. You can speculate as to whether you think M&S shares will rise and buy (go long) or, if you think they will fall, sell (go short) using either CFDs or spread bets.

  1. Create an IG trading account or open My IG to your existing account
  2. Enter ‘Marks and Spencer Group’ or its ticker, ‘MKS.L’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

If you want to try your trading strategy risk-free then why not try an IG demo account? Plus, you can look to invest in M&S shares using an IG share dealing account, whereby you can buy the shares outright from just £3.

Learn of all the ways to trade with IG

Where next for the M&S share price?

This is not the first turnaround plan that M&S has had to implement, but what matters is that it is the last. The deal with Ocado has thrusted M&S into the fastest-growing part of the grocery market and coincided well with the accelerated adoption of online shopping during the pandemic, and the streamlining of the business has been welcomed. But investors are yet to be fully convinced considering how poorly shares have performed this year.

The news that the grocery venture would make 50% more profit than previously thought sent Ocado shares up over 9% on Monday while M&S experienced a much milder rise that peaked at just 3.2% - reflecting the fact that investors are aware that are still big problems for M&S to address. This includes the steep declines in clothing and homeware sales and the concerns of operating a vast network of stores during the pandemic.

Read more: How to buy, sell and short Ocado shares

Things were already tough for M&S before the coronavirus changed everything, so it is unsurprising that M&S shares have suffered heavily this year. The deal with Ocado has put its food business on the right path, but investors are still waiting to find out how M&S plans to rejuvenate the rest of the business.

For now, it looks like M&S will have to endure more pain before it sees any gain considering it is expected to sink to a loss for the first time as a public company. M&S is still predominantly a bricks-and-mortar retailer and that will be a huge problem until a solution to the coronavirus is found.

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