An impressive sales turnaround at Marks & Spencer (LSE:MKS) helped launch the retailer back into the FTSE 100 index in September.
And since its promotion to the Footsie it has been one of the index’s best performers too. Indeed, the company soared another 11% on Wednesday following the release of half-year numbers.
These fresh financials have been greeted with positive noises across the City. Analyst Mark Crouch of eToro commented that “after multiple false dawns over the years, Marks & Spencer’s turnaround looks like the real deal this time.”
Broker estimates suggest that the company is at the beginning of a period of sustained earnings growth. M&S is tipped to grow annual earnings by 4% in the current financial year (to March 2024). Bottom-line rises of 12% and 8% are forecast for fiscal 2025 and 2026 as well.
What’s more, these numbers could be upgraded following those splendid half-year results. Could the retailer be one of the FTSE 100’s best growth stocks to buy right now?
Let’s looks at the key takeaways from Marks and Sparks’ interims. They showed sales soared 10.8% between April and September, to £6.2bn. Strong demand for its food lines in particular kept the tills ringing with sales of its edible goods rising 14.7% year on year.
The revamp of its clothing operations also continued apace, pushing revenues across its Clothing & Home division 5.7% higher.
Pre-tax profit leapt 56.2% from a year earlier, to £325.6m. And net debt dropped by £364.7m to around £2.6bn.
Arguably the biggest news was M&S’s decision to relaunch dividends following its robust first half. A 1p per share interim payout marks the first cash reward since the Covid-19 outbreak.
While Marks’ performance has been mighty impressive, the risks to future earnings remain considerable.
A laser focus on value helped its revenues to rise more recently. Unfortunately pressure to slash prices will continue as the cost-of-living crisis endures and Britain’s economy cools, potentially limiting profits growth.
Barclays just announced that debit and credit card spending rose at its weakest pace for 13 months in October. This is an especially troubling omen for the key Christmas period.
Growing competition across both the clothing and grocery sectors mean that the pressure to keep discounting will likely remain a long-term problem too. Don’t forget that the threat from rivals including Next, Zara and H&M remains huge.
The retailer’s joint venture with food delivery expert Ocado also continues to experience problems. In fact its own adjusted losses here ballooned to £23.4m in the first half from £700,000 a year earlier.
Are Marks shares a buy?
Recent share price strength mean Marks & Spencer shares trade on a forward price-to-earnings (P/E) ratio of 13 times. This is above the wider FTSE 100 average, and in my opinion isn’t compelling enough to encourage me to invest.
In fact, following its recent price gains I fear that a share price correction could materialise if trading does indeed cool. On balance, I’d rather look for other growth stocks to buy right now.