A general view of a Marks and Spencer store in Merthyr Tydfil, Wales (Photo by Matthew Horwood/Getty Images).

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After quadrupling from its 2022 bottom to hit a 5-year high in April, the Marks and Spencer share price has since lost its spark. The stock has slid 14.3% after a cyber attack left its near-term earnings potential hampered. Despite that, I remain bullish.

Sparkling Year Dampened

It might not seem like it, especially looking at its current share price, but Marks and Spencer actually had another amazing year. Its stellar FY25 numbers were unfortunately overshadowed by the cyber attack. As such, I thought it’d worth highlighting what a solid ear M&S had.

Statutory revenue grew a healthy 6.0% to £13.82 billion. Of this, Food was the main driver, as sales increased 8.7% to £9.02 billion. Fashion, Home, and Beauty (FHB) also had quite decent growth of 3.5% to £4.24 billion, but this was still rather impressive amid a very slow apparel market in 2024. On the other hand, International was the main laggard, as sales fell 8.5% to £658 million due to overstocking.

Meanwhile, M&S’s joint venture (JV) with Ocado continued to show good progress. M&S’s portion of adjusted attributable profit jumped 23.1% to -£29 million. This was after revenue had risen 25.2% to £3.09 billion, with margin expansion allowing the JV’s adjusted EBITDA to more than double to £62 million. Much of this came from market share growth alongside bigger orders and a higher number of active customers with increased frequencies.

As a consequence, the company’s adjusted EBIT saw growth of 17.4% to £985 million, with adjusted EBIT margin also expanding by 68bps to 7.08%. This was aided by structural cost reductions of around £120 million, as M&S continued to simplify its store operations and support centres while investing in automation and efficiencies.

Net interest income was also a tailwind. Interest payables, in particular, headed downward due to the repurchasing of medium-term notes. Hence, adjusted PBT had a lofty mark up of 22.3% to £876 million. And with the help of a lower tax rate, adjusted diluted EPS grew 31.3% to 30.6p, with DPS also rising 20.0% to 3.6p.

Short-Term Pain for Long-Term Gain?

The firm’s guidance was conservative, as many long-term investors have become accustomed to, only this time with a different set of circumstances. The board expects the cyber incident to result in a £300 million hit to EBIT for FY26, weighted towards H1. This will be made worse by labour cost headwinds from a higher minimum wage and employers’ national insurance, set to be worth £120 million.

Be that as it may, the medium-term investment case remains intact, in my opinion. For one, I believe that the £200 million worth of cumulative cost savings through to FY28 will cushion some of these costs. Plus, food inflation should peak soon and alleviate some margin pressures on the group’s biggest revenue driver. With M&S Food now Britain’s seventh-biggest F&B grocer, its 5.1% F&B market share gives it a strong base to continue building on.

At the same time, the underlying business prospects for FHB remain extremely promising. Customers are trading up to M&S with higher shopping frequencies, bigger basket sizes, and more favourable value and style perceptions. Management is still aiming for FHB to grow its online market share to 50.0% from its current 34.0%. What’s more, FHB’s online margins should expand as supply chain improvements and digital investments go live.

As for International, while it comes with its own set of uncertainties, I have confidence that a gradual recover is possible, too. The deployment of a more capital-light model and the launch of M&S’s first international FHB wholesale partnership in Australia following the success of Food in the US, should lead to more exciting things to come. If this success can continue to spur further momentum, I foresee a margin recovery, too.

Finally for Ocado, while I’m not forecasting the JV to breakeven just yet, I’m still upbeat about the medium term. I’ve modelled for profitability by FY28, provided the current momentum continues, with promising signs of accelerated sales from active customer growth, better value proposition, and an improved delivery service. And with M&S now taking technical control of the JV, I hold the view that better synergies can be expected, shoring up margins further.

A Remarkable Recovery On the Cards?

So, this then begs the question – can M&S stage the type of recovery it saw when it rose from the ashes when CEO Stuart Machin took charge? Well, I’m confident in the team’s abilities – especially if their past performance is anything to go by. As of today, M&S has reinstated most of its online and delivery orders, which should give scope for a recovery in H2, before full – and arguably better – execution in FY27.

Therefore, Food will most certainly be the main growth driver this year, as FHB and International take a back seat from the cyber incident. Food should record another substantial leap in sales thanks to a grocery inflation tailwind, but I imagine the cyber incident and labour cost hikes will take a toll on margins, as a less-effective supply chain and higher waste will most likely disrupt yields.

Going into FY27, though, Food growth should slow as grocery inflation cools, but this should be offset by further market share gains and trading up momentum, as well as the rebound in FHB and International – this time with a much better omnichannel sales experience in place. All of this should result in a margin uplift, and go hand-in-hand with what I expect to be higher interest income and lower interest payables.

Nonetheless, I stress that my estimates are contingent on the macroeconomic outlook remaining sturdy, and that the path for interest remains downward, as that will be the main catalyst for further outperformance. For now, that is my base case, although I’m paying very close attention to the labour market, the development of real wage growth, and the government’s fiscal spending patterns.

But for now, I still see a healthy amount of upside for Marks and Spencer shares to realise, especially after a further sell-off. Currently, I have modelled for the conglomerate to grow its EPS at a CAGR of 11.45% through to FY28, with EPS hitting 35.9p by then – very much in line with the mid-range of consensus.

On that basis, the stock is trading at an extremely cheap PEG of 1.0. This is below its 5-year sector average of of 1.4, with other earnings multiples such as P/E (11.5) and FP/E (10.7) also trading below their historical averages of 24.3 and 11.3, respectively. Thus, that I have a fair value target of 395p for the Marks and Spencer share price.