FTSE 250: M&S profits slump amid surging costs

M&S A view of the Marks & Spencer branch in Ashford, Kent, as the company has named it amongst the next wave of stores earmarked for closure in its reorganisation plan.
M&S has said it faces a 'gathering storm', with next year likely to be more challenging. Photo: PA

M&S (MKS.L) has warned of a “more challenging 2024 because of higher costs and pressure on household budgets as profits nosedived.

Here's what came down from the high street giant this Wednesday:

Sales: £5,563.6m versus £5,112.9m in October 2021

Profit before tax & adjusting items: £205.5m, a 23.7% drop

Statutory revenue: £5,538.2m versus £5,105.3m in October 2021

The retailer reported a 24% drop in profits before tax to £205.5m ($237m/€235m) in the six months to October as surging inflation ate into margins. Food sales rose 5.6% while clothing & home sales were up 14%.

Underlying earnings in the food division slumped to £71.8m from £124m a year earlier as it said it chose not to pass on an 11% increase in costs in full to customers.

Profits were also hit by the cost of higher property taxes after the end of business rates relief, as well as the retailer’s exit from Russia.

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The group warned of "more challenging" trading ahead in the cost crisis and said it was looking to cut costs by around £150m in the coming financial year to offset soaring inflation and help it weather the storm.

Stuart Machin, the chief executive, said: “Across all M&S markets it is highly likely that conditions will become more challenging in the 2024 financial year.

“As we enter what is traditionally our strongest quarter the business continues to trade well.”

Third Bridge analyst Orwa Mohamad, said: “Our experts say that overall revenues for the UK grocery market will be flat or in decline over the next 6 months. Any growth in revenues is going to be driven by inflation.”

“Margins erosion will continue for at least the next 12-18 months because of M&S’s positioning. Our experts say that M&S needs to absorb some inflation costs because it lacks the scale advantages enjoyed by the likes of Tesco. It will probably look to reduce promotional activity first.”

“Discounters like Aldi and Lidl are on the march again growing their market share on the back of inflation hikes and an elevated cost-of-living.”

“This Christmas will be crucial for M&S. A lot hinges on the grocer’s ability to persuade people to have a restaurant-like experience at home as they downtrade from restaurants and meal delivery.”

“The biggest challenge for M&S is shifting its image from an occasion shop to a weekly shop. There is a risk that large numbers of infrequent shoppers simply drop the brand from their repertoire as they trim back their discretionary spend.”

Read more: Inflation: Milk, tea bags and sugar prices soar as food bills hit record highs

M&S said it expects to post full-year pre-tax profits “similar” to the guidance it set out previously, with most analysts expecting a fall in underlying profits to £397m against £523m in 2021-22.

To help shoppers, M&S relaunched its ‘Remarksable’ value range at the start of the year. The range includes “bigger packs, better value” on 40 lines offering 5% savings per unit volume and this month it “locked” the prices of 100 family favourites through to 2023.

M&S recently announced it is speeding up a major shake-up of its stores estate, which will result in the closure of 67 larger shops.

Machin added: “Looking beyond the current stormy weather, much is in our control and our mandate is clear – to step up the pace, accelerate change, drive a simpler, leaner business and invest in growth opportunities to build a reshaped M&S.”

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