Is the skyrocketing Marks & Spencer share price a sign to buy?

The Marks & Spencer share price exploded this morning on impressive earnings. Zaven Boyrazian investigates if now is the time to buy.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Investors in Marks & Spencer (LSE:MKS) are undoubtedly happy today since the share price just surged by almost 15%. Today’s boost comes after the company released its half-year report. And it brings the supermarket’s 12-month performance to an impressive 86% return. So, what was in this trading update that’s got investors so excited? And is now the time to add this business to my portfolio?

The M&S share price surges on earnings

Like many retailers, 2020 was a challenging year for Marks & Spencer, which saw its share price plummet early on. With the pandemic causing customer footfall in its physical stores to plummet, the supermarket reported a nearly-£200m loss.

Since then, things have improved significantly. With the vaccine rollout making substantial headway, lockdown restrictions have been mostly lifted. And looking at these latest results, it seems the business is back on track. Sales over the last six months have jumped 24.8% compared to a year ago. And they’ve even climbed 5% higher than pre-pandemic levels. That came as it said its under-pressure Clothing & Home department saw improved full-price sales. Consequently, after-tax income moved out of the red from a loss of £71.6m in 2020 to a gain of £159.9m today.

As a result of increased cash flows, the net debt position of the retailer has also seen a significant improvement. As of 2 October, net debt, including lease liabilities, stood at £3.15bn. That’s about £670m less than a year ago and £920m lower than pre-pandemic levels.

Seeing the financial health of this business improve combined with rejuvenated revenue streams is quite encouraging to me. And given the upward direction of the Marks & Spencer share price today, it seems the market agrees.

The risks that lie ahead

As impressive as the firm’s performance has been, there remain several challenges ahead. Covid-19 is no longer preventing customers from getting into stores. But the same can’t be said about products! The pandemic is still wreaking havoc across supply chains. And combining this with the Brexit-triggered HGV driver shortage, the business still has some significant headwinds.

As such, management is expecting a rise in supply-chain-related operating costs throughout the rest of the year, continuing into 2022. It’s currently unclear how severe these increased expenses will be. But the firm having yet to reintroduce dividends despite profits returning higher than 2019 levels suggests there’s potential trouble ahead for the Marks & Spencer share price.

Time to buy?

As frustrating as the supply chain issues are, these are ultimately short-term problems. And with its recently improved financial standing, I believe the company is more than capable of weathering the storm. However, my overall opinion on Marks & Spencer and its share price potential remains unchanged. The company looks like a fine business, but I still think my money is better invested elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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