Last month, one of the best performing investments on the market was the Marks and Spencer (LSE: MKS) share price. During August, shares in the retailer added around 35%.
Investors rushed to buy the stock after the company upgraded its profit guidance for the first time this century. I think this could be just the start of a much longer run higher for the stock.
Performance improvement
In 1979, Warren Buffett wrote: “Both our operating and investment experience cause us to conclude that turnarounds seldom turn.” The billionaire investor was speaking from experience after trying and failing to turn around several businesses throughout his career.
Since then, he has advised investors to avoid these situations, especially when it comes to retailers.
This mentality has always led me to the conclusion that M&S will never return to its former glory. And that seemed to be true until this year. It now looks as if the company’s plans are starting to yield results.
In an unscheduled trading update published towards the end of August, the retailer informed the market that profit before tax for the current year would be “above the upper end of previous guidance of £300m-350m.”
The group has seen a substantial recovery across all business lines. The food business, which has a partnership to supply groceries with Ocado, has seen sales leap 10% above pre-pandemic levels. Meanwhile, clothing and home sales have rebounded. They are now just 2.6% below 2019 levels.
It seems as if the group, which has been working on a turnaround for as long as I can remember, is finally heading in the right direction. The Marks and Spencer share price reflects this.
The partnership with Ocado is yielding results. Store closures have helped reduce costs, and customers seem to like its clothing and home offering.
Management is working on other initiatives that could only help reinforce the firm’s position in the market.
Growth initiatives
Last year it launched a new business unit, known as MS2. This division aims to bring together online, data and digital capability to ramp up fashion and homeware sales through bricks-and-mortar stores. It is trialling the technology at several stores, and a further rollout is planned.
Video retailing is also being trialled to help customers shop from home.
It looks to me as if the retailer is firing on all cylinders. That is why I believe the Marks and Spencer share price can push higher. If the company’s turnaround continues to yield results, investors may continue to drive the stock higher.
That being said, the retailer’s growth is not guaranteed. The industry is incredibly competitive, and just because the company is making progress does not mean that it will continue to do so. Cost inflation may also eat into profit margins, destabilising the organisation’s recovery.
Despite these risks, I would buy the stock for my portfolio as a recovery play. I am willing to go against Buffett’s advice just this once, considering M&S’s recent progress.
