Marks & Spencer Reports Mixed Half-Year Results With Cautious Outlook; Trading in 2H Looks Good

Marks & Spencer reported mixed fiscal 2023 half-year results. U.K. sales growth was driven by both food sales, which were up 5.6%, and the clothing and home division, which grew robustly by 14%. More important, group operating profit before adjusting items came in weak at GBP 280.7million, of which GBP 243.2 million was in the U.K. and GBP 39 million was in international. Trading in the first four weeks of the second half is in line with recent trends, with clothing & home sales up 4.2%, food sales up 3.0%, and international up 4.1%. Management remains cautious on its outlook, as cost pressures continue to be elevated but the company expects to annualize some cost increases seen in last year's third quarter. In 2023, the business will not receive business rates relief (about GBP 60 million) and M&S' share of Ocado Retail's net income to group results is expected to be negative. As a result, it expects adjusted profit before tax for the year to start from a lower base (GBP 70 million-GBP 80 million lower than guidance of GBP 500 million adjusted profit). We expect a less constructive backdrop in fiscal 2023 (fiscal year-end: March 2023), as cost pressures from a challenging market environment should continue to have an impact on consumer spending patterns, especially for discretionary items. We don't expect to materially alter our fair value estimate for M&S, as profit guidance and a softer short- to medium-term outlook should be offset by the time value of money as we roll our model to account for this set of results. Shares trade in 4-star territory.