The Marks & Spencer (LSE: MKS) share price was flying in early trading today on news of improved trading. After a horrendous few years for holders, should I now consider this battered retailer to be an excellent contrarian investment?
Why the MKS share price is jumping
Despite the “highly uncertain” trading outlook at the beginning of the year due to Covid-19 constraints, the company said it had seen an “encouraging performance” over the 19 weeks to 14 August. This, it believes, is evidence that the strategy to transform the business is working.
Revenue from the company’s Food arm “outperformed” over the period. Thanks to strong trading at its larger stores, sales were up 10.8% on last year. They’re also up 9.6% from two years ago. Even hospitality and franchise are “progressively improving” as restrictions have eased.
Of course, the food offering at Marks has never really been the issue. It’s the company’s clothing range that’s continually struggled. However, revenue at this division almost doubled (+92.2%) on last year with smaller sales and promotions helping full-price sales rise approximately 9% on pre-pandemic numbers.
There’s also been a good recovery in sales away from Marks’ home market. International revenue rose a little under 40% over the period, despite sporadic lockdowns and Brexit-related delays.
All told, group revenue was 4.4% higher than in 2019/20.
But can this be sustained?
The company is inclined to think momentum can be maintained, even if “pent up consumer demand” may be partly responsible for this return to form.
Accordingly, the FTSE 250 stock now expects adjusted pre-tax profit to be “above the upper end of previous guidance of £300m-£350m“. I can’t remember the last time when those words were uttered in a statement from the company. No wonder the MKS share price is up 11%, as I type.
That said, I do think it’s important to consider the reasons for me to continue avoiding the stock.
Inflation concerns
For one, the encouraging outlook is dependent on Covid-19 being effectively beaten. As things stand, I don’t believe we can be completely confident of this. Regardless, the slow recovery in footfall and normal working patterns mentioned today could persist.
Like many listed companies, M&S could also be impacted by inflation and supply chain issues going forward. To date, it’s managed to mitigate this by reducing costs. However, there’s clearly a limit as to how far this can go. Should prices continue rising, margins could get squeezed even tighter.
Third, I need to put today’s numbers in perspective. Clothing sales might be back to 2019/20 levels, but I wouldn’t take this as evidence the company has shaken off its ‘frumpy’ image just yet. A rebound isn’t the same as shooting the lights out. Moreover, its physical stores continue to struggle with sales down by almost 20% compared to 2019/20.
A long way back
As encouraging as today’s update is, I think the MKS share price has a long way to go before we can really be sure the company is back on form. Despite rising 45% over the last year (including today’s gain), the stock has still roughly halved in value since 2016. Oh, and there’s no dividend stream either.
In conclusion, I’ll be keeping an eye on Marks for now. For the reasons mentioned above, I won’t be adding the shares to my own portfolio just yet.
