Image source: M&S Group plc
The market likes today's (May 22) full annual results report from Marks and Spencer (LSE: MKS) and the share price is soaring. As I write, it is up almost 10%.
However, judging by the strength of the numbers and the tone of the commentary on the outlook, this could be near the beginning of the company's recovery and growth story.
Multi-year operational progress
The stock's rise today is part of a streak that began last fall. It appears that investors can no longer ignore the accelerating change in the underlying business.
The numbers are impressive. In the business year to March 30, revenue rose more than 9% and adjusted profits soared just over 45%.
Chief executive Stuart Machin was optimistic in the report. For two years, the company has been pursuing a plan to reshape the business for growth. Now, the directors ““We can see the beginnings of a new M&S.”
The food, clothing and home categories grew in volume and value share. “ahead of the market.”
Machin said both the online and in-store businesses have achieved 12 consecutive quarters of sales growth. Commercial drive gives directors “trust” The plan is working.
Trust is a word I like in directors. It carries much more conviction than the frequently used “convinced”, for example!
The company's previous investment in store rotation and end-to-end supply chain is starting to pay off, Machin said. New stores and renovations are “Performance ahead of schedule.” Meanwhile, profit margins have been increasing due to supply chain modernization.
An optimistic outlook
Looking ahead, Machin emphasized the “clear plan (and) vision for the future,“insist that there is “a lot” opportunity ahead.
Meanwhile, City analysts have forecast a profit rise of just over 8% for the current business year to March 2025. They also expect the company to continue rebuilding its shareholder dividend with a payout of around 6.0%. 2p per share.
With the share price near 298p, the forward price-to-earnings (P/E) multiple is just below 12 compared to those estimates, and the expected dividend yield is around 2%.
That compares to the P/E of FTSE 100 index about 14.5 and its yield about 3.3%. So, at first glance, M&S's valuation is still not excessive.
With all this good news under its belt, Marks and Spencer looks like a “safer” investment now than it did last fall. However, “safe” often means lower or slower returns for new shareholders.
Stable performance ahead?
The ship seems stable, but even now there are many things that could go wrong. The company operates in a cyclical sector. Any further slowdown in the economy could ruin future trade figures.
The retail industry is also competitive, and new or rejuvenated existing players can eat into the company's market share in the future.
On top of that, the business still has a lot of debt; I would like to see that debt reduced even more in the coming years.
However, in general, I would consider the stock for inclusion in a diversified portfolio now with an expectation of stable returns in the coming years.
