Marks & Spencer is no stranger to false dawns, so caution from the management is understandable.
Better food sales and stronger margins across both sides of the business propelled adjusted pre-tax profits to £360 million, a way ahead of the £275 million analysts had forecast for the first six months of the year.
Profits of that magnitude are not expected to repeat in the second half. Stuart Machin, its chief executive, is “quietly confident” about Christmas and says momentum in October has been sustained. However, how sales fare next year is far less certain.
Interest rates are the highest they have been in two decades and there is the chance that geopolitical turmoil will have a knock-on effect on the macroeconomic picture.
Annual sales comparatives were also easier in the first six months of the year and it has already banked £100 million of the £150 million in cost savings targeted for the year.
Yet the consensus forecast for adjusted pre-tax profit this year is still likely to shift from £575 million to £640 million, management thinks.
Another upgrade has added a tenth to the share price and narrowed the valuation gap between Marks & Spencer and Next, its more successful high street rival. The shares now trade at more than 11 times forecast earnings, versus under 13 for the latter.
There are tangible signs of progress. The food business grew sales volumes ahead of the market in each of the six months to September, coming in at 8 per cent in the final month of the period versus just 1 per cent for the broader grocery sector.
Taking cost out of the business, including rationalising the number of suppliers and reducing the headcount at head office, has also helped lift margins. For the food business, the adjusted operating margin rose to 4.2 per cent, ahead of a 4 per cent target, and 12.1 per cent for clothing and home, in front of a 10 per cent goal. The proportion of clothing and home sales, a weak spot for the retailer, has stood north of
80 per cent for the past three years, up from between 65 and 70 per cent in 2019 and 2020.
Cash generation is stronger and net debt has reduced to £320 million, excluding lease liabilities, at the end of September. That is half the figure at the same point last year. As expected, the dividend has been restored, even if only to 1p a share, for the first time since before the pandemic.
A recovery in the shares this year is justified but it leaves the retailer valued closely to its long-running average. To bet that there is more upside to come, it needs to demonstrate that the group can pull off a more enduring improvement in its profitability and balance sheet.
There are still areas to attack. Detail on how clothing and home sales volume have performed is scarce. Like-for-like sales were 5.5 per cent higher but non-food inflation has been running at between 6 and 7 per cent over the past six months, according to the Office for National Statistics. In shops, which account for about two thirds of the total clothing and home sales, the average basket value was up just more than 6 per cent but weekly transactions were down almost 2 per cent.
The Ocado joint venture is a dead weight, with a loss of £23 million in the first six months of the year. Only 75 per cent of capacity is being used, which has accentuated the drag from a high level of fixed costs within the online delivery operation.
The strategy is sensible. In particular, to cut down on clothing product lines and reduce “full line” shops, in favour of more food-only and modern stores with less surplus space. Now it needs to show more proof that shifting its estate will translate to better clothing volumes.
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ITV
ITV has been attempting to tune a better picture. The media group is trying to prove that making programmes and capturing the shift to digital advertising via its streaming platform are enough to counter the challenges faced by advertisements on television.
However, the studio business does not run counter to fluctuations in the broader economy.
ITV has cut the revenue growth outlook for the business to 3 per cent, below the mid-single revenue growth that it had anticipated. It follows a 9 per cent rise in revenue in the first nine months of the year.
Free-to-air broadcasters face their own pressures on revenue as advertisers cut back on spending, and in turn have decommissioned shows or delayed decisions.
Advertising, which still accounted for more than 40 per cent of revenue, even in a falling market, declined 7 per cent. This year total advertising revenue is expected to be down 8 per cent.
The group is still heavily reliant on linear advertising. Digital advertising was up a quarter in the first nine months of the year but only accounts for a fifth of total group revenue.
ITV is pushing out its own content spend. The broadcaster will move some dramas, which had been due to air this and next month, to the start of next year.
Part of the fee is paid to the production company when content is commissioned, another part when it is broadcast. The move will save about £10 million in content costs this year.
A target to save £50 million in costs by 2026 is intact, which includes making gains from suppliers and its property footprint.
A deteriorating picture on profits has been matched by a weaker valuation. The shares trade at just seven times forward earnings, a well-founded discount to the historical average.
Analysts at Shore Capital cut their profit forecasts for the next three years, including almost 10 per cent to the profit it expects for 2025. In that year the brokerage forecasts adjusted pre-tax profit of £573 million, which would equate to a 10 per cent slide against last year. Potential catalysts for the shares are hard to see.
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