At the start of September, I said I was “increasingly excited” about the outlook for Marks & Spencer Group (LSE: MKS). The M&S share price has since risen by 35% and is now up by 77% over the last year. I think it’s time to take a fresh look.
Do I still think Marks & Spencer shares look cheap — and would I buy them today?
Why did the stock soar?
Let’s start with a quick look at what’s happened. In August, Marks & Spencer said that food sales over the previous five months had risen by 10.8%. Even clothing sales were less than 3% below 2019/20 levels. Not bad, I thought, given the impact of Covid-19 restrictions.
I decided to make M&S my top stock for September. The shares still looked cheap to me, and I expected a strong set of results in November.
Chief executive Steve Rowe delivered. Adjusted pre-tax profit for the six months to October was 53% higher than during the same period in 2019. Investors piled in and the Marks & Spencer share price rose by 25% in one week. That’s pretty unusual for a FTSE 250 stock.
What’s the situation now?
Over Christmas, I asked (mostly) female family members about M&S. I was surprised how many had become frequent M&S Food shoppers. I’m pretty sure that five years ago, none of them were regular customers.
However, I also was told by the more fashionable members of my family that M&S clothing is still a no-go zone.
While the food business is clearly doing well, Rowe still has some work to do in the fashion department.
Fortunately, the company’s latest numbers suggest to me that he may gradually be winning. Although total clothing and home sales fell by 1% during the half year, full price sales rose by 17%. This suggests to me that M&S buyers are ordering more accurately and are not needing to discount as much to clear old stock.
Where next for the M&S share price?
Marks & Spencer has had a strong run since September and the shares now trade on 12 times 2021/22 forecast earnings. Can the shares continue to rise?
I can see some risks. Food growth has been helped by online ordering through the group’s joint venture with Ocado. I wonder if online grocery demand will slow after the pandemic.
Rising wage costs could put pressure on profit margins. The clothing business could also continue to drag on profits.
Brokers covering the stock seem to be taking a cautious view on the year ahead. Consensus forecasts for the 2022/23 financial year show profits dipping this year before returning to growth the next year.
If this view is right, then I’d argue that the shares could be fully priced at current levels.
However, I’m encouraged by Marks & Spencer’s recent momentum. In my experience, when companies start beating forecasts — as M&S did in the autumn — they often continue to do well.
I don’t think the Marks & Spencer share price is as cheap as it was in September. But I still think the stock looks reasonably valued. I’d still consider buying M&S stock for my portfolio today.