The Marks & Spencer (LSE: MKS) share price is up by 5% as I write, even though the high street retailer reported a half-year loss of £72m this morning.
I’m not surprised. Today’s half-year results are better than expected. I think the chances that CEO Steve Rowe will pull off this difficult turnaround are improving. I’ve stayed on the sidelines so far, but I think M&S shares could be worth a closer look.
Tasty results from food
Although sales for the whole group fell by 15.8% to £4,091m during the first half of the year, this was to be expected. The first lockdown kept the firm’s clothing and home stores closed for months. Although online sales rose by 34%, this wasn’t enough to make up for lost store sales.
The good news is that the food business still seems to be doing well. During the six months to 26 September, M&S generated food sales of £2,838.6m, almost unchanged from the same period last year. That’s a decent result in my view, given that many of its food outlets are in travel and hospitality locations where sales have slumped this year.
The food business is profitable, too, with a half-year operating profit of £109.7m. That’s 19% more than the same period last year and gives an operating margin of 3.9% — almost level with sector leader Tesco, at 4.2%. I’m impressed. I think the strong showing from food is probably why Marks & Spencer’s share price is rising today.
Interestingly, around one-third of food profits came from the group’s new joint venture with Ocado. Management say that sales through Ocado Retail contributed £38.8m of profits during the half year. I’m optimistic about this new venture.
Cash keeps flowing
M&S has historically generated strong free cash flow. That still seems to be true. Free cash flow for the half year recovered from £23.3m to £77.6m this year, despite the impact of Covid-19.
I was also pleased to see that the group’s net debt has fallen. Excluding lease liabilities, net debt fell from £1.61bn to £1.4bn during the first half of the year. That’s a solid reduction when the company is still investing in its turnaround.
Achieving such a strong result during this year gives me confidence that Marks & Spencer is unlikely to face a cash shortage for the foreseeable future.
Marks & Spencer share price: My view
Marks & Spencer’s clothing and home division is the oldest part of the business and the most problematic. Efforts to improve the performance of this business have been accelerated this year, according to CEO Steve Rowe.
Looking ahead, Rowe plans a much greater focus on online sales and quicker stock turnover. Stores in retail parks — which have performed better this year — will also remain a priority.
I don’t know how easy Rowe will find it to turn around the group’s clothing operation. But with Marks & Spencer’s share price still trading below 100p, I think the food business alone is almost enough to justify the current valuation.
For this reason, I’ve added the stock to my portfolio watch list as a potential turnaround buy.
The post Marks & Spencer’s share price is rising: Here’s what I’d do appeared first on The Motley Fool UK.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.
Motley Fool UK 2020