British retailer Marks & Spencer led the opening rally on the FTSE 100 index’s final day of trading this month after proffering up an encouraging fourth quarter trading statement that reassured analysts and investors alike as to the state of the retail industry.
M&S beat market expectations by a fair margin to report like-for-like sales in the 13 weeks to March 28 down just 4.2% on the same period last year—considerably better than the average 7% decline expected by analysts and a clear improvement on the 7.1% fall in the previous quarter, which had included the key Christmas trading period. Adjusting for Easter falling late this year would add around 0.7% to the sales figures, bringing the overall performance even higher than analyst forecasts.
Breaking the sales figures down by product, general merchandise fell 4.8% year-on-year versus the previous quarter’s 8.9% slide, while food slipped 3.7% against the third quarter’s 5.2% decline, revealing improving trends in both areas.
Chairman Stuart Rose commented: “While the outlook remains uncertain, we are confident that we are doing the right things for our customers and for our business.”
Going forward, the group said it expects UK retail gross margin for 2008/09 to be around 175 basis points lower than in the previous year—the low end of the guidance range provided at the third quarter trading update, but this was to be expected and should not raise any concerns, analysts said.
Responding to the update, analysts at Panmure Gordon said M&S’s much-better-than-consensus fourth quarter sales prove that the market has been right to focus on the upside post-recession rather than worry about the short-term effects of the economy on profits.
The broker said its base case has for some time been that the group’s food business is structurally challenged and the analysts believe this division will emerge from the recession with lower margins, which will drag last year’s £1.0 billion profits down to £858 million. However, this would have the stock trading on 7 times adjusted peak earnings, which the broker thinks looks too undervalued and it therefore continues to expect the shares to outperform.
Panmure Gordon rates M&S a Buy with a price target of 300p. Numis Securities, meanwhile, said in a note to investors this morning that today’s figures should not have come as such a surprise to the market and it was staggered that consensus had remained so low given the strong trading since the start of the year.
Numis is keeping its forecasts unchanged but looking through the cycle—an approach it is taking across the sector—it has added weight to its valuation for the M&S stock and raised the price target to 235p from 195p previously, prompting an increase in recommendation to Reduce from Sell.
Analysts at KBC Peel Hunt disagreed with those at Numis, saying they do expect to see upgrades across the market this morning. However, the broker said that while official sales figures remain downbeat, most of the quoted retailers appear to have enjoyed more stable trading patterns over recent weeks and it believes it is this factor that is the driving force behind M&S’s performance, rather than a particular outperformance from the company. As such, it stuck with its Sell recommendation and target of just 180p and said it prefers competitor Next for its better cash generation and lower gearing.
At 9.30am, M&S shares had surged to their highest level in over seven months on the back of the upbeat trading update, adding 29p or 11% to 293.5p. The retailer was the top performing blue-chip, helping the FTSE 100 index to take on 2.2% to 3,846.5. Tracking M&S shares, other retailers rallied on the positive read-across: Next added 6.4% to 1,335p, Kingfisher ticked up 6.5% to 150p and Home Retail Group added 5.3% to 224.75p.
