The Motley Fool

Marks & Spencer’s share price is rising: Here’s what I’d do

Image source: Getty Images

The Marks & Spencer (LSE: MKS) share price is up by 5% as I write, even though the high street retailer reported a half-year loss of £72m this morning.

I’m not surprised. Today’s half-year results are better than expected. I think the chances that CEO Steve Rowe will pull off this difficult turnaround are improving. I’ve stayed on the sidelines so far, but I think M&S shares could be worth a closer look.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Tasty results from food

Although sales for the whole group fell by 15.8% to £4,091m during the first half of the year, this was to be expected. The first lockdown kept the firm’s clothing and home stores closed for months. Although online sales rose by 34%, this wasn’t enough to make up for lost store sales.

The good news is that the food business still seems to be doing well. During the six months to 26 September, M&S generated food sales of £2,838.6m, almost unchanged from the same period last year. That’s a decent result in my view, given that many of its food outlets are in travel and hospitality locations where sales have slumped this year.

The food business is profitable, too, with a half-year operating profit of £109.7m. That’s 19% more than the same period last year and gives an operating margin of 3.9% — almost level with sector leader Tesco, at 4.2%. I’m impressed. I think the strong showing from food is probably why Marks & Spencer’s share price is rising today.

Interestingly, around one-third of food profits came from the group’s new joint venture with Ocado. Management say that sales through Ocado Retail contributed £38.8m of profits during the half year. I’m optimistic about this new venture.

Cash keeps flowing

M&S has historically generated strong free cash flow. That still seems to be true. Free cash flow for the half year recovered from £23.3m to £77.6m this year, despite the impact of Covid-19.

I was also pleased to see that the group’s net debt has fallen. Excluding lease liabilities, net debt fell from £1.61bn to £1.4bn during the first half of the year. That’s a solid reduction when the company is still investing in its turnaround.

Achieving such a strong result during this year gives me confidence that Marks & Spencer is unlikely to face a cash shortage for the foreseeable future.

Marks & Spencer share price: My view

Marks & Spencer’s clothing and home division is the oldest part of the business and the most problematic. Efforts to improve the performance of this business have been accelerated this year, according to CEO Steve Rowe.

Looking ahead, Rowe plans a much greater focus on online sales and quicker stock turnover. Stores in retail parks — which have performed better this year — will also remain a priority.

I don’t know how easy Rowe will find it to turn around the group’s clothing operation. But with Marks & Spencer’s share price still trading below 100p, I think the food business alone is almost enough to justify the current valuation.

For this reason, I’ve added the stock to my portfolio watch list as a potential turnaround buy.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.