Marks & Spencer Reports Strong Q3 and Christmas Trading; Shares Cheap

Marks & Spencer reported strong third-quarter results. U.K. sales growth (up 9.7%) was driven by both food sales, which were up 10.2% (outperformed the market both on volume and value in the four-week Christmas period), and the clothing and home division (highest market share in seven years according to the company), which grew robustly by 8.8%. 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. As a reminder, in 2023, the business will not receive business rates relief (about GBP 60 million) and Marks & Spencer's share of Ocado Retail's net income to group results is expected to be negative. As a result, management 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 Marks & Spencer, 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.