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An impressive turnaround in sales Marks and Spencer (LSE:MKS) helped launch the retailer back into the market FTSE 100 index in September.
And since his promotion to the Footsie he has also been one of the best performers on the index. In fact, the company soared another 11% on Wednesday following the release of its half-year figures.
This new financial data has been received with positive noises throughout the city. Analyst Mark Crouch of eToro commented that “After multiple false dawns over the years, Marks & Spencer’s turnaround appears to be real this time..”
Broker estimates suggest the company is at the beginning of a period of sustained earnings growth. M&S is expected to grow its annual profits by 4% in the current financial year (to March 2024). Earnings increases of 12% and 8% are also forecast for fiscal years 2025 and 2026.
What’s more, these figures could improve after those splendid half-year results. Could the retailer be one of the best FTSE 100 growth stocks to buy right now?
Brilliant update
Let’s look at the key conclusions from the interim work of Marks and Sparks. They showed sales soared 10.8% between April and September, to £6.2bn. In particular, strong demand for its food lines kept checkouts alive and sales of its grocery products increased 14.7% year-over-year.
The revamp of its clothing operations also continued apace, driving revenues from its Clothing & Home division 5.7% higher.
Pre-tax profit rose 56.2% on the previous year to £325.6m. And net debt fell by £364.7m to around £2.6bn.
Arguably the biggest news was M&S’s decision to relaunch dividends following its strong first half. An interim payment of 1p per share marks the first cash reward since the Covid-19 outbreak.
The risks
While Marks’ performance has been impressive, the risks to future earnings remain considerable.
A laser focus on value helped its revenue rise more recently. Unfortunately, pressure to reduce prices will continue as the cost of living crisis persists and the British economy cools, potentially limiting profit growth.
Barclays just announced that debit and credit card spending rose in October at its weakest pace in 13 months. This is a particularly worrying omen for the key Christmas period.
Increasing competition in the clothing and grocery sectors means that pressure to continue discounting will also likely remain an issue in the long term. Don’t forget that the threat of rivals, including NextZara and H&M are still huge.
The retailer’s joint venture with the food delivery expert ocado also continues to experience problems. Indeed, his own adjusted losses here soared to £23.4m in the first half from £700,000 a year earlier.
Is Marks Stock a Buy?
Recent share price strength means Marks & Spencer shares are trading on a forward price-to-earnings (P/E) ratio of 13 times. This is above the broader FTSE 100 average and, in my view, not compelling enough to encourage me to invest.
In fact, following the recent price rises, I fear that a share price correction could materialize if trading really cools down. Ultimately, I prefer to look for other growth stocks to buy right now.
