Can M&S Sustain the 75% Gain?

So far, M&S has managed to be the better performer among the grocers faced with the cost of living crisis, but can that last?

Avoiding the Trend

M&S shares have pushed up 75% since last October, defying many analysts' expectations who kept expecting a downturn in sales. However, the company's perception of the more affluent clientele appears to continue to shop despite higher inflation. At its Christmas trading update, M&S reported group sales of +9.9%, a little below inflation, implying a real (albeit minor) drop in sales. The total food sales rose 10.2%, close to the inflation rate for the period, suggesting that M&S customers keep shopping at the same rate. M&S also saw substantial support from international sales, growing even faster at 12.5%.

The consensus among analysts is that both the top and bottom lines will see growth when M&S reports its annual results on Wednesday. For the second half, EPS is forecast at £6.28, with sales expected at £5.03B. It appears that analysts have finally started to adjust for the better performance that M&S has had. Rivals Tesco and Sainsbury saw revenue increase by around 6% in the same period, while online sellers such as Next and Boohoo saw sales fall. The expected growth rate would once again make M&S the top performer in the UK retailer space, despite sales growing slower than inflation. That is assuming analysts get it right this time.

The Good and Bad

While the topline performance is expected to be stellar, investors might be more concerned about margins. Higher costs for materials and energy is expected to push down earnings. M&S's larger reliance on clothing could hurt growth, as rival clothing stores have seen declining sales. On the other hand, the firm might still be able to rely somewhat on the lipstick effect that appears to be keeping sales in non-essentials at the store, outperforming rivals.

On a more positive note, investors might be keen to see if the company resumes paying a dividend for last year. The CEO hinted as much at the interim results, suggesting that the resumption of the dividend would be discussed at the end of the year. M&S's positive Christmas trading update has generated some hope of a dividend, and if the company decides to hold on to its cash for another year, it could hurt the stock price.

M&S Imminent Breakout?

Marcks and Spencer's share price has consolidated for the best part of April and May; a breakout could be imminent. Breaking past the top of 170 GBX could initiate an upward leg toward 182,  the measured-move projection. Conversely, losing the floor at 158 GBX could see prices decline toward 148 GBX, the gap open seen at the end of April, exposing 136 GBX and prolonging the potential correction.

Key Takeaways

M&S has performed better than its rivals in the cost of living crisis, with its perception of having more affluent customers helping to maintain sales. Analysts predict growth in both the top and bottom lines when M&S reports its annual results on Wednesday, thanks to its strong performance. However, investors may be concerned about margins due to higher costs for materials and energy. The resumption of dividends may also impact the stock price if not paid out this year.