If I had to pick just one FTSE 250 stock to buy in July, that would be Marks & Spencer (LSE: MKS).
In the past, I’ve not been too kind about this enterprise. It seems as if the group has been a turnaround story for years and results have been thin on the ground. Shareholders have suffered as a result.
FTSE 250 stock losses
Investors who were unlucky enough to buy the stock at its 10-year high of around 550p in May 2015, have seen the value of their investment fall by 73%, excluding dividends.
Over the same period, the FTSE 250 retailer’s operating profit has crumbled. In 2015, operating profits exceeded £550m. In its last financial year, the group lost £38m.
Granted, 2020 was an exceptional year for the retail industry. However, even in 2019, group operating profits were around half of the level reported for 2015.
However, it appears to me the outlook for the retailer is starting to improve. From a low base, the company is rebuilding profitability and, as the economy moves towards a full reopening later this month, I think sales trends could accelerate.
M&S is currently in the middle of a transformation process called ‘Never the Same Again’. The idea here is to focus more on food and online retail, as well as the more profitable bricks-and-mortar stores and better-performing clothing lines.
To that end, the group has formed a partnership with Ocado, which seems to be performing better than expected. In addition, the company is investing more in its reward card and online operations.
Paying off
The transition appears to be paying off. In the financial year to the beginning of April, food sales grew by 6.9% on a like-for-like basis.
Meanwhile, online sales increased nearly 54%, although this failed to offset the decline from high street store closures. As a result, total revenue declined 31.5%. Still, I think these numbers show the company’s investment in its online business is paying off.
As well as the above, the group’s share of its income from the Ocado joint venture was £78.4m last year, up from £2.6m in the prior year.
While it’s clear to me the company still has some problems, such as its considerable exposure to the high street, I think these figures show the FTSE 250 enterprise is heading in the right direction.
That’s why I’d buy the stock for my portfolio today. As the economy reopens, activity in Marks & Spencer’s stores should recover, and this is the last piece of the puzzle. With the rest of the group firing on all cylinders, growth could accelerate in the second half of the year.
Of course, there’s no guarantee this will happen. Another wave of coronavirus could put consumers off store shopping. If the economic recovery fails to live up to expectations, consumer spending may also fall. The company may also have to deal with higher costs and staffing issues. Retailers and hospitality companies are struggling to recruit staff across the country, which could impact growth.
Still, I’d buy the FTSE 250 stock today as its recovery starts to bear fruit, despite these challenges.
