The Marks and Spencer (LSE: MKS) share price has been on a great run this year. Since the easing of pandemic restrictions, the retailer has been seeing steady price growth. Its shares are up 75.8% in 2021 to date and 91% in the last 12 months. But what’s the reason behind the latest jump and should I invest in the company today?
Excellent earnings report
The recently published half-year report (for the 26 weeks ended 2 October) showed a good jump in revenue and sales compared to pre-pandemic 2019 levels. M&S’s recovery was fuelled by the return of foot traffic to its stores and its online ops.
The company recorded a profit before tax of £269.4m £187.3m, up from 2019’s £158.8m, and it saw growth across most divisions. Food sales went up 10.4% and revenue from the segment grew to £143.7m from £92.2m. Profits from the Clothing and Home (C&H) division stood at £156.2m after £109.6m two years ago. The retailer also managed to cut its net debt by 22.6% to £3.15bn.
Reaping benefits from Ocado partnership
But to me, the most impressive business move by M&S was the purchase of a 50% stake in Ocado Group in August 2019. In hindsight, the move was perfectly timed, with the pandemic hitting a few months later in early 2020. The company’s online customer base continues to grow and the retention of customers gained during the pandemic (supported by Sparks data) is a huge positive in my book.
M&S product sales of £309m via Ocado accounted for 27% of its total sales. Although this figure is expected to decrease with normalising shopping patterns, the company sees this as a short-term issue.
And I think this partnership will help M&S navigate the challenges of the supply chain in the post-pandemic world. Automated warehousing is Ocado’s USP and the company has been investing heavily in automating order processing with AI-driven robots. This could help cut down on labour costs. I think M&S will have the pricing advantage over the coming decade, given the move to automated warehouses in the grocery sector.
Concerns and verdict
M&S has acknowledged concerns over a new Covid outbreak in several parts of the world, including key import markets like India and China. Also, I see strong competition from the rise of discount retailers like Aldi and Lidl as a major concern for M&S today. Intense competition in the sector could cause prominent retailers to lose out on market share to such discounters in the UK.
The border disputes with the EU and rising labour costs, the effects of which the company expects to extend into FY 2022-23, could be issues too. And investors may even switch to dividend-heavy defensive investments in the space like Tesco and J Sainsbury if inflation issues persist. Both alternatives have a larger market share and could cope with rising costs better in the long run.
I’m watching M&S closely to see how it navigates the next few months. I think the market is very quick to react to negative news right now and global developments could dent the Marks and Spencer share price. I’d prefer investing in Tesco over M&S today because of the dividend yield and large market share. Although M&S’s long-term future could prove fruitful, I’m looking for stable options given the market situation.
Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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