M&S bounces back after finding the secret of high street success

Marks & Spencer has announced a remarkable turnaround in its fortunes and a huge spike in profits, writes James Moore. It’s benefitting from revamped stores and smarter online strategy – but that doesn’t mean there won’t be more pain to come

Marks & Spencer has reported bumper profits (PA)

M&S the toast of the City? You’d have been laughed out of town for predicting that just a few short years ago. But this business has been one of the more remarkable turnaround stories of recent years and all achieved against brutally tough trading conditions.

Back in the FTSE 100 after a four-year absence, the half-year results smashed the City’s forecasts with a 36 per cent rise in statutory pre tax profit to £325.6m. If you prefer the company’s “adjusted” numbers that becomes a 75 per cent rise and £360.2m in profit.

The company might have cause to regret putting such a flattering figure out into the world. Russ Mould, from broker AJ Bell, opined that the results were “so good that management’s biggest challenge now may be to stop analysts getting over-excited and prevent them from upgrading their numbers too much and setting too high a bar of expectations”.

The own-label fizz was positively raining down on the group’s investor base. Almost every number you could think of was looking good. Sales? Up. Debt? Down. Even the chefs at M&S Food would struggle to produce a cake so sweet. And the cherry on top? The resumption of a dividend payment. The shares positively jumped for joy.

No one is now talking about this company in the same breath as Woolworths, BHS, Debenhams, Comet et al, as they once were. A succession of big name, big money, and all male CEOs were drafted in as the business attempted to revive its fortunes, especially its core womenswear division, which had established a reputation for frumpy clothes that even grandmothers would baulk at wearing.

But it was the low-profile Steve Rowe, an M&S lifer whose appointment to the top job drew a great big ‘meh’ in the City, who ultimately managed to prove that it is sometimes possible for a titanic to miss the iceberg. Rowe shook things up, signing a deal to buy half of Ocado UK which looked pricey at the time, part of his emphasis on food. He also axed some of the ageing in-house brands and closed a lot of stores. It wasn’t all good. Despite his rise through the ranks, he upset a lot of the group’s loyal workforce along the way, and not just because of the store closures. There was also work still to do, for example, in reviving the group’s tech, when he left.

But even though the revival took a knock from the cost of living crisis and, obviously, the pandemic, the group is now steaming ahead with the food business still the star for Rowe’s successor Stuart Machin. That’s quite something today, given the number of people trading down as a result of wages undershooting inflation for such a long time. M&S food bears a “premium” tag. But the retailer declared that it was “outperforming all mainline grocers on volume as customer numbers increased”. The clothing and home business? It did just fine too. “Women’s denim and casual bottom sales increased 17 per cent, while holiday wear increased 18 per cent,” gushed the group’s statement.

It appears the revamped stores are working while the online business is getting better. Combining bricks and clicks has become the way forward for formerly old-school retailers like M&S. It has taken a while for the company to get this right. But here is proof that it can be made to work.

It is still tough out there on the high street. Machin and his peers can’t afford to be sentimental. Outlets made of bricks and mortar that don’t wash their faces are going to get closed down. It is probably fair to say that no store is completely safe. That applies across the punch-drunk High Street. Is there a worse ground report than “heavy”? Out and out bog perhaps? We are in a bad economy without much to be optimistic about in the near future. There will, I am afraid, be more casualties.

That is a big part of the reason why analysts raise the issue of expectation management at M&S ahead of the crucial Christmas trading period, and why Machin warned of an “uncertain” outlook “with the probable impact on the consumer of the highest interest rates in 20 years, deflation, geopolitical events, and erratic weather”.

You can read that as his saying, cool it please, it’s still tough! Don’t make me a victim of the success of my team here. Bad luck Mr Machin. Here was Shore Capital: “Blown the bloody doors off! More upgrades!” And there were plenty more notes like that put out by the City’s scribblers.

The M&S CEO now faces having to run very fast to stand still, at least so far as the market’s expectations are concerned come the post-Christmas rush of trading updates.