M&S profits surge, so is its turnaround now complete?

M&S almost declared its turnaround ‘job done’ on Wednesday as it delivered its latest annual results. It didn’t quite use those words, but it may as well have done as it delivered a set of spectacular figures for the 52 weeks to the end of March and talked of “the beginning of a new M&S”.

Its shares jumped nearly 10% in early trading, a further sign of how the market thinks the turnaround is now set in stone.

Having written about the firm’s recovery efforts since roughly the turn of the Millennium (around about the same time as Gap Inc began its own long turnaround journey across the Atlantic), the latest report was an undeniably pleasing read.

So what’s the headline news? Profit before tax and adjusting items rose from 453.3 million to £716.4 million, and statutory profit before tax was up to £672.5 million from £475.7 million. 

Revenue rose 9.3% to £13.04 billion. Importantly, as well, its adjusted return on capital employed rose to 14.1% from 10.6%.

Sales wise, Food was the strongest division (up 13% with a margin of 4.8%), but Clothing & Home (C&H) also shone. Its sales rose 5.3%, while adjusted operating profit jumped from £323.8 million to £402.8 million. And it had a strong and rising margin of 10.3%.

Like-for-like C&H sales rose 5.2% and “heartland categories” of women’s and menswear outperformed, “due to improved product style, quality, and value”. 

Particular highlights were a “robust performance” in core product in categories such as denim/casual bottoms, knitwear, and bras; men’s Autograph sales up over 50%; growth in holiday sales of around 15%, reflecting a return to travel and events; and total Clothing market share rising to 10%, plus a full-price share that increased to 12.4% from 11.6%.

Yet not everything was perfect. Its Ocado Retail joint venture remains an issue and its International division (minus the Republic of Ireland as this will in future be part of an expanded UK/ROI division), saw constant currency sales falling 1% and adjusted operating profit down to £47.7 million from £67.9 million.

Strategy pays off

But it’s clear that the core operations in the UK (and Ireland) that M&S relies on are firing on all cylinders and the company is understandably upbeat.

CEO Stuart Machin said: “Two years into our plan to Reshape for Growth we can see the beginnings of a new M&S.” Both Food and C&H “have now delivered 12 consecutive quarters of sales growth and this trading momentum gives us confidence. We are becoming more relevant, to more people, more of the time”.

He added that “investment in store rotation and the end-to-end supply chain is beginning to pay off. New stores and renewals are performing ahead of forecast and attracting new customers. [And] supply chain modernisation supported margin growth across both businesses.”

After the market share rise in Clothing, Machin sees “substantial opportunities for growth to achieve our ambition of a 1% market share increase between FY23 and FY28”.

Action on fashion

So what’s been behind the C&H comeback? M&S has been buying more deeply into core lines, translating fashion trends into greater newness and concentrating supply with strategic partners and a faster supply chain.

It’s been reducing the long tail of option count, with a double-digit percentage reduction in womenswear since 2019/20; “buying bolder and deeper”, growing lines with over £1 million of sales by around 50% over the last two years; increasing the full-price sales mix from 63% to 81% since 2019/20; and improving stock flow with stock cover now less than 12 weeks, compared with 18 weeks in 2018/19.

And its focus is squarely omnichannel for fashion. Physical store C&H sales rose 4.1% last year with a good performance in shopping centres and retail parks. It opened six full-line stores, which sell both C&H and Food, and closed 12, of which five were relocations. All replacement stores “substantially outperformed the closed stores and exceeded forecast returns”.

And this is a key focus for the current year too. In 2024/25 it’s opening up to four new full-line stores and “implementing a refreshed renewal format”. It continues to hunt for new sites.

Its long-term objective for M&S.com’s share of the firm’s C&H sales is to grow towards 50%, having increased from 22% five years ago. 

Its online C&H sales growth was 7.8% this time and it accelerated in H2, particularly in womenswear. The app also continued to grow, accounting for 44% of online orders, up from 37% in the previous year. 

And partner brand sales grew 33%, with new partners added including Adidas, Puma, and Sweaty Betty, supporting the growth of average basket value.

Supply chain improvements

The supply chain is a crucial part of the company’s success, and it said it made progress on phase one of its ‘end to end’ programme.

Its ambition “is to move from a slow-moving operation with a broad supply base and DCs which store stock, to a group of strategic suppliers with a rationalised network of automated DCs, where full visibility enables us to flow stock more directly to the customer”.

It has begun to consolidate knitwear, denim, and lingerie across fewer suppliers. The number of fabric mills has also reduced as volumes are combined.

In UK logistics, volumes were consolidated into nine core sites. Investment in omnichannel capability and the increased use of hub stores for returns consolidation delivered cost savings. This year, further investment will be made, such as a new planning, merchandising and range management platform.

Progress on Plan A was also made with the use of recycled polyester increasing to around 70%, and 100% of cotton now responsibly sourced in clothing.

It said it’s “at the beginnings of a new Clothing, Home and Beauty business, with a better product and trading model and an improving customer proposition, which is resonating with a broader customer base”. And it spoke of “substantial opportunity” ahead.

But profitability isn’t yet “market-leading, despite our scale advantage. There is much more to do to develop the online and M&S App experience and customer engagement, whilst growing partner brands. All of this will help retain customers within our M&S eco-system”.

International headache

So what about the International business issues where it “has not made as much progress as our UK businesses”. It’s seeing a “reset”. M&S aid: “We plan to leverage our UK business and trusted brand to increase global reach through capital-light partnerships and a multi-platform online business with global reach”.

International sales dipped to £719.1 million. As a result of weaker sales growth in H2 and action to reduce stock levels, while adjusted operating profit dropped sharply, as mentioned above.

Retail sales growth was down 3.6% in constant currency in H2 against tough comparatives and a softer market backdrop. Action was taken in India to clear overstocks and reduce inventory holdings. Online sales were £118.6 million, down 10.2% as “promotional activity was reduced and changes were made to the delivery proposition to improve profitability”.

But the firm said it saw improved profitability in the Republic of Ireland. Sales there were “encouraging”, growing by 2.4% at constant currency to £320.7 million. Operating profit before adjusting items improved to £27.9 million from £16.9 million last year.

From the 2024/25 financial year, the results of the Republic of Ireland will be reported as part of a new UK and Republic of Ireland segment within both Food and Clothing & Home.