In the 26 weeks to September 26, 2020, revenue fell by 16% to £4bn while the group swung to an adjusted £17mln loss before tax, from last year’s £176mln profit.
According to Peel Hunt, the results were predictably poor but “it is hard to blame management for that” considering the challenges posed by the pandemic.
The loss, the company’s first in 94 years, was still well below the broker’s forecast of £60mln and the broad consensus of £58mln thanks to the strong numbers coming from the Ocado Group PLC (LON:OCDO) joint venture.
The retailer is planning a reorganisation of its store estate, its online channel and the clothing & home (C&H) division, which is said to be long overdue by many.
The streamlining, which may see retail parks favoured over high street stores as part of a wider industry trend, is expected to bring home £115 of annual cost savings.
“Whether the speed of this transformation is too little, too late remains to be seen, but M&S is making every effort to stem what has been a slow decline over recent years,” said Richard Hunter, head of markets at interactive investor.
“Long since the thorn in its side, the C&H business remains under severe pressure.”
Trying to get clothing & home back in fashion
The segment, considered as unfashionable among younger customers for a few years now, was bashed further by the lockdown and the subsequent closures of stores.
Revenue tanked 41% in the second half, although the 21% drop in the second quarter was a significant improvement on the 61% decline seen in the first three months of the financial year.
Profits are expected to fall again during the upcoming month-long lockdown, though they are expected to be offset by increased online sales and reduced costs supported by furlough income.
Stock levels are down by over £100mln compared to 2019, meaning less stock hibernated to next Spring than previously envisaged.
The retailer is also launching MS2 to create a single integrated online, digital and data team within C&H to compete with other ‘pure play’ e-commerce brands, an area where the FTSE 250 group has historically struggled to keep up with peers.
“Clothing rebrands have been and gone at the retailer before, and bosses will have to work very hard to ensure this time around the new styles really do stand out from the fashion pack,” noted Susannah Streeter, senior analyst at Hargreaves Lansdown.
“The group’s been able to shift much more of its excess stock than it thought, meaning it could reclaim some of the hefty provision it had set aside. That stronger trading has come at the expense of margins though, as M&S took to sale stickers to get the inventory out the door.”
Strong appetite for food
Investors were relieved to see a defensive performance in the food segment, where revenue rose 3% excluding hospitality, which was largely closed during lockdown, while operating profit jumped by 19% after lower costs offset reduced sales in food-on-the-move and hospitality.
The joint venture with Ocado, which many saw as a costly project, generated net profits of £38mln for M&S in the first half and is expected to deliver £15mln of synergies in the current financial year.
“Food has always been a strong area for M&S, and with the pandemic helping to drive sales it would have been disappointing, if the benefits of the Ocado deal weren’t being reflected in this area,” said Michael Hewson, chief market analyst at CMC Markets UK.
“While most of the headlines are likely to be around the fact the company has slipped to a loss, the outlook for the business does seem a little brighter, with the Ocado deal a decent foundation for a recovery.”
“Even with today’s numbers, this month’s lockdown until December is yet another headwind for the sector, with no guarantee that physical stores will be able to reopen to take advantage of a pre-Christmas rush.”
A digital Christmas
Looking at the upcoming festive season, M&S has made “substantial plans”, including the expansion of the teams to serve online orders by 30% at its Castle Donington distribution centre, an increase in-store picking capacity, a ‘book and shop’ app to avoid queues and product lines which are more suited for smaller gatherings.
“Unsurprisingly the share price has reflected the torrid time which the company has endured, with a decline of 57% in the year to date underlining its parlous position,” Hunter concluded.
“Over the last year, the shares have lost 49%, as compared to a decline of 14% for the wider FTSE250 index, and a drop of 82% over the last five years is proof positive that changes are essential.”
“Given the basement price of the shares in comparison to its former strength and with some signs of improvement being displayed, the market consensus of the shares remains defiantly at a buy.”
Shares added 5% to 96.79p on Wednesday in mid-morning.