M&S shares soar 45% in 3 months: What should investors do?

M&S shares almost halved in value in 2022 against difficult market backdrop, as consumers were forced to cut spending amid soaring cost pressures.

The high street giant’s shares had been on a downward trajectory since 2015 as investors mourned flagging sales, before bottoming out at the height of the pandemic in May 2020. 

Since then, the retail giant has been forced to reconfigure its strategy, sparking a serious comeback for its flagging share price. 

An M&S kind of turnaround: Shares in the retailer are up 17% this year as its five year strategy starts to bear fruit 

M&S shares are now up nearly 17 per cent since the start of 2023 following a strong set of results after Christmas.

It’s the kind of turnaround co-chief executives Stuart Machin and Katie Bickerstaffe would have hoped for when they took the helm last year. 

But is this the start of a sustained comeback for the 139-year old retailer or is the recent rally destined to be short-lived?  

Why have M&S shares fallen so much?

In 2019 M&S dropped out of the FTSE 100 for the first time in a clear sign of the retailer’s fading fortunes.

It had been battling slowing growth in its all-important clothing business, while its food division had also started to show signs of weakness.

Just a year earlier, former boss Steve Rowe and chairman Archie Norman outlined their five year strategy to ‘fix the basics’. 

This included simplifying the business structure, closing distribution centres and some stores, and cutting jobs. It also began a radical overhaul of the M&S clothing offering to battle online-only retailers and appeal to a younger audience.

‘We thought M&S was a well respected brand name which had lost its way strategically under previous management,’ said Ian Lance, manager of Temple Bar Investment Trust which holds M&S among its top 10 holdings.

‘In particular, they had expanded their store estate at a time that most rival firms were making the transition to online e.g NEXT Directory. This meant that not only did sales suffer but costs were too high and hence they made a lower profit margin than their peers.’

One pandemic and a cost-of-living crisis later, M&S shares have continued to take a beating with the shares falling from 214p at the start of 2020 to 123.3p by the end of 2022.

They took a dramatic fall last October after M&S warned energy costs were rising £40million more than expected, creating possible headwinds of more than £100million by 2023.

In a presentation to institutional investors, the retailer said it would cut the number of clothing and home stores by 67 to take the total to 180 by 2028.

While the market responded as expected, Jefferies raised its target price on the stock from 115p to 125p before its third quarter trading update published earlier this month.

In a note they said: ‘Early days but M&S is starting to show encouraging staying power against a volatile backdrop.’

Has the new strategy paid off for M&S?

Evidence of the success of the new strategy played out in this month’s trading update, which covered the third quarter and Christmas period.

M&S total UK sales were up 9.87 per cent, beating market expectations of 4.9 per cent. Within that, food sales were up 10.2 per cent, nearly double analysts’ expectations and reaching their highest ever recorded market share. 

Clothing and home sales, which have been at the heart of the new strategy, grew 8.8 per cent and achieved over 10 per cent market share for the first time since 2015.

It has also started to play catch up with its rivals when it comes to online sales. 

Monthly active app users reached 5million in the third quarter and its tie-up with Ocado Retail has led to its products representing 30 per cent of the average basket on Ocado.com over Christmas.

‘Management have articulated a strategy of growing market share by 1 per cent in both food retail and clothing and home and taking margins to 4 per cent and 11 per cent respectively. This should mean the business is capable of generating somewhere between 25-30p of earnings per share,’ said Lance.

‘Even if the shares were only valued on 10x earnings, that would equate to 250p to 300p compared to todays price of 150p. It is worth noting that the share price had recovered to more than 250p at the start of 2022 before the advent of the Ukraine War.’

Peel Hunt analysts updated its target price from 120p to 150p following the update. It is currently trading at 148p.

In a note they said: ‘We had overdone our gloom, therefore we upgrade back into the pack. This is not to suggest that M&S (or any retailer) is out of the woods yet and calling the consumer is tough. 

‘But in these challenging times, M&S has hit a bit of form and our numbers now reflect that. The valuation suggests that life will remain and the shares aren’t ‘must haves’ but they are not expensive and have decent yield support.’ 

What are the challenges for M&S?

Retailers and supermarkets enjoyed an unexpected boost during the Christmas period, with forecasters having expected a difficult economic outlook to weigh on consumer spending.

Next boosted its profit guidance after a better-than-expected festive period in which full-price sales were up 4.8 per cent.

Other retailers also performing strongly, so what makes M&S a standout? 

Temple Bar’s Lance says M&S is a ‘long-term fundamental recovery story not just a cyclical recovery story’.  

While M&S might have turned a corner, the resilience seen among consumers over the Christmas period might start to fall back in 2024. 

‘Inflation reached record highs in 2022, driving up costs and forcing many retailers to pass on price increases,’ said Simon Underwood, business recovery partner at accountancy firm Menzies. 

‘The fact that consumers have had to pay more for their purchases has helped retailers to drive revenues in the run up to the festive season, despite growing concern about the cost-of-living crisis.’ 

But margins will soon start to be eroded by inflationary pressures, particularly energy bills as M&S experienced last October. 

In its latest update, M&S referenced inflationary pressures and cited clear headwinds with underlying cost pressures.

‘It’s hard to say what the future holds for the retail sector in 2023, but with costs rising and uncertainty ongoing, there is bound to be some impact on consumer confidence. 

‘Retailers will need to stay agile to market changes, keep a close eye on costs and protect margins to weather the uncertainty ahead,’ said Menzies.

Inflation will be a significant challenge for M&S, as will the ever growing dominance of discounted retailers like Lidl and Asda. 

But the retailer said it had earmarked around £150million to offset soaring prices and tougher conditions over the next few months.

Peel Hunt analysts said: ‘The shares have sort of joined in the sector’s rally and were maybe expecting more today, but we think there are signs of real progress here.

‘The valuation remains lowly and whilst the consumer is not out of the woods, this is one that is worth looking at when the odd macro signal turns more positive.’