High street giant Marks and Spencer (LSE:MKS) is known for its mass-market-but-quality clothing, home products, and upmarket food items. So far in 2023, the Marks and Spencer share price has surged over 100%. So is there still a chance for new investors to get involved, or has the opportunity passed?
Why has 2023 been a success?
Marks and Spencer — or M&S as it’s also known — has seen an impressive increase in key financial metrics this year. Revenue in the first half of 2023 came in at £6.13bn, a healthy 11% above the same period in 2022. Net income also grew by 25% to £208m. This improvement contributed to a higher profit margin of 3.4%, up from 3%. Impressive numbers, especially when comparing the share performance against competitors Tesco and Sainsbury’s. But what’s causing this?
The retailer’s significant investment in its online platform has paid off, especially in the wake of the pandemic, which accelerated the shift towards e-commerce. By enhancing its digital presence, the company was able to reach a wider audience, including younger consumers, and offer a more convenient shopping experience.
Its company’s strategy to close underperforming stores and refresh others has also led to a more effective physical presence. This approach helped focus resources on locations with the highest potential.
As a result, M&S has demonstrated robust growth. The company’s earnings have been growing at an average annual rate of 44.6%, notably outperforming the retail industry average of 18.8%. Despite this impressive earnings growth, revenue growth has been more modest, averaging 1.6% annually.
Is there more to come?
The balance sheet reflects a solid financial position. The company’s total shareholder equity stands at £2.8bn, with total debt of £1bn, resulting in a debt-to-equity ratio of 36.8%. Its total assets amount to £8.8bn against liabilities of £5.9bn, fairly sustainable in a high interest rate environment. The company also holds cash and short-term investments worth £838m to weather any future turbulence.
By looking at the price-to-earnings (P/E) ratio (12.2 times), we see a company that’s fairly cheap relative to the average of the sector (28.4 times). Similarly, the discounted cash flow calculation, which assesses a fair price, suggests that despite the meteoric rise in 2023, the share price of £2.51 is still as much as 36% below the fair value of £3.92.
However, with the share price doubling in a year, there’s always going to be a danger to investing now. I don’t want to join the party just as the music stops. Earnings growth for the company is expected to be 7%, notably lower than the sector at 13.9%. So there’s a very good chance that investors may want to take profits and move on at the first sign of trouble.
Am I buying?
Marks and Spencer appears well-positioned to navigate the challenges in the retail sector.
However, with such a rapid rise in the share price in 2023, the company must continue adapting to changing consumer behaviours and market competition while maintaining its core brand values. I suspect that new investors may have missed the majority of the excitement, but there could be a decent amount of growth still to come. I won’t be investing for now, but will be adding the company to my watchlist.
