Has M&S finally regained its luster?

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After two decades of restructuring, six CEOs, a FTSE 100 rollback and billions in costs, investors dare to ask: Are Marks and Spencer finally fixed?

This week, the British retailer raised its earnings forecast for the second time this year. It now expects to take in £500m before exceptional cases for the full year, close to pre-pandemic levels, as demand recovers for overhauled clothing and foods provide an appeal to shoppers.

M&S stock price has doubled in the past year, while some of its leaner competitors like Asos and Boohoo have plummeted in value.

But no one at the company’s London headquarters is drifting away yet. M&S President Archie Norman said the reforms his team was pushing would fundamentally change the organization, not only providing a short-term boost to profits, but that the group still had a long way to go.

“We’ve broken the old culture, but we haven’t built a new one yet,” he told the Financial Times. “I would say we’re about 40 percent of the way there.”

The food business is the most visible success since the last update, which began in 2016. Under former supermarket executive Stuart Machin, M&S has gone from selling “Food Tonight” using a mix of confusing promotions, to being a credible company. A “family shop” place with simpler prices, better value and greater focus on fresh produce.

A joint venture with Ocado gave M&S the means to sell food online — something that small food stores and low average basket sizes prevented — and increased their volumes.

Marks & Spencer branch in 1966. After a difficult few years, it once again made its way to become the UK’s largest online clothing retailer © Getty Images

“Food goes from strength to strength,” said one of the people who previously participated in the department. “Bigger volumes mean more efficiency, less waste and stronger profit margins, because they get better terms from suppliers.”

In the half year to October 2, food sales were up 10 percent from the same period before the pandemic and by 16 percent once sales through coffee shops and franchise stores were withdrawn. Operating profit was £143m, up from £92m two years ago.

Clothing is still a work in progress but is also showing signs of improvement. Marks & Spencer has doubled down on areas in which it has strong market positions, such as denim, schoolwear and underwear, and reduced the number of options in other areas.

Ian Lance, fund manager at RWC and director of Temple Bar Investment Trust, said: “Many investors have written off M&S years ago and thus have lost the transformative change that occurred under the new management, which saw their food retail business backed by Ocado move the deal. and Home Apparel to become the UK’s largest online clothing retailer.

“The incredibly exciting part is that this transformation is just beginning and has a long way to go. The market has yet to fully appreciate the potential of this business in our opinion.”

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James de Uphaugh of Majedie Asset Management was similarly optimistic: “After so many years of false dawn at M&S, investors’ muscle memory has become very suspicious but M&S ​​has quietly attracted a high-level operational management team, capital allocation is now strong and most importantly the interims have shown that both From food, clothing and home are gaining market share.”

However, one of the executives of a rival fashion chain was more silent. “Clothing has been in decline for a long time, and had to bounce back at some point,” this person said, adding that while value and availability had improved, M&S “wasn’t quite winning the nation.”

“They need to get the basics right, and then overlay that with something extra special — like they do in food. I don’t see that yet.”

Behind the scenes, M&S is working on other improvements. Its outdated IT infrastructure has been modernized, while its online ordering repositories, which once regularly fail to handle the surge in demand, have been overhauled.

The pandemic gave Norman the opportunity to accelerate the pace of change. “We were suddenly having a very different set of problems so there was no point in having the usual meetings . . . it created a bias for action rather than excuses.”

An M&S store in Birmingham, 1983. Many of their stores are still in antebellum buildings on the main streets where parking is difficult and footfall is low. © Staff / Mirrorpix / Getty

Long-discussed changes to store management have been pushed, with 7,000 surpluses mostly voluntary. Online sales, which have been stuck at just under 20 percent for years, now account for 34 percent. A new fashion e-commerce platform, MS2, has been launched with “disruption power” and the company has begun selling third-party brands such as Jigsaw and Jaegar online.

Norman, who began his tenure in 2017 by articulating the “disembodied truth” that Marks and Spencer had no “divine right to exist,” said the changes in culture and leadership were more important.

“All the power — marketing, IT, human resources — was in the center, not on the edge of the shelf near the customer,” he said.

“The sense of organization has been great and very powerful, but this is not a business,” added Norman, who kicked top CEOs out of their ninth-floor offices and sent them to sit with their teams.

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Other changes happen more slowly, in particular the overhaul of store ownership. Norman noted that three-quarters of competing Next stores were less than 20 years old, while many Marks & Spencer stores were in dilapidated pre-war buildings on main streets where parking was difficult, footfall was low and operating costs were high.

“[Next] He’s been driving this road for years while M&S slept at the bus stop.”

It’s not the only unpleasant comparison. Online sales at Next topped half of the total two years ago, its UK apparel market share is larger than M&S and its market value is more than double that of its competition.

Wary of prematurely declaring victory, M&S CEO Steve Rowe acknowledged the changes in the market, with names like Debenhams, Arcadia, Gap and TM Lewin having all but vanished from the main streets over the past year.

He also noted the positive impact of pent-up demand on recent trading – which may be declining – and the rising challenges of inflation and pressures on household income and supply chain issues.

Norman said financial restructurings that boosted profits for a while have been easier and more common than the deep restructuring he’s trying.

He recalled his decade-long transformation of the Asda supermarket chain in the 1990s: “We outperformed the market four years later. But the true strength of the organization wasn’t really evident until about the seventh year.”

Additional reporting by Harriet Agnew

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