M&S Earnings Preview

UK retail sales have come in above expectations, but will that hold true for M&S as the firm adjusts to a new Chief Executive?

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Best of a bad bunch?

M&S is the last of the major UK supermarkets to report in this cycle, but there isn't all that much hope it will break from the pack. Rivals Tesco and Sainsbury warned that profits were expected to be impacted this year as Britons face a cost-of-living crunch. M&S already warned that it faced headwinds, and the upcoming earnings could be an opportunity to refine the outlook, with the worry that it could be further downgraded.

On the other hand, some are banking on the notion that since M&S customers tend to be on the more affluent side of the spectrum, it could be the least affected due to rising inflation. Food tends to be the last item to be cut from cost-conscious budgets. On the other hand, clothing represents over a third of the firm's revenue; and wearing clothes for longer does tend to be something people do in a higher cost environment.

What the expectations are

The consensus is that M&S will report pre-tax profits of p522M, an improvement over the p403M reported in the prior year. The issue is that this is expected to be driven by a 10.3% increase in nominal sales, which would be great in an environment where inflation wasn't rising at 9.0%. And this is compared to one of the worst years for the retailer, in the middle of covid. Which explains the expectation for a 46.6% increase in clothing and homeware sales.

For its Christmas trading update, M&S reported clothing & home revenue increased 37.7%, meaning that there is good reason to expect the full year to have similar results. However, when compared to the year prior to the pandemic, Christmas clothing sales were up only 3.2%. Focus is likely to be on inventories and margin pressures.

M&S near major support

Despite the divergence observed on the stochastic oscillator, M&S share prices have been rejected both at the 50% and 61.8% Fibonacci retracements. The last rejection at the golden ratio could drive prices down closer to the Aug ’20 swing high (now support) near p118.75. This could turn into an area where price meets the trendline connecting the p75 and p86 lows.

If the longer-term divergence plays out above the p86 low of Oct ‘20, a chance at reversal may be offered to bulls. Resistances lie at the Fibonaccis, near p147 and p190. But, below p180.35, where the crossover of the 20 and 50 averages can be currently observed, the outlook remains bearish.

Source: Spreadex trading platform

Key takeaways

M&S sales will be impacted by the rising cost of living but there is some scope for it to ride out the rising inflation better than some rivals. The firm’s profits are forecasted to improve compared to last year, however, this is expected to be driven by inflation. Accounting for inflation would make it one of the worst performing years. Investors’ focus will be on inventories and margin pressures on M&S clothing & home.