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The Marks & Spencer (LSE:MKS) share price is at the same level as six months ago. This was hailed as a growth stock last year, when the retailer’s transformation strategy started to boost finances. Yet it’s been treading water in recent months, which could put off some new investors who could be fearful that the best has already happened. Here’s my take.
Dealing with headwinds
I can see several factors that have influenced the underwhelming performance in recent months. In April, the business suffered a devastating ransomware cyberattack. Hackers took down its online operations and click-and-collect services. The closure of these channels lasted quite a few weeks and is estimated to have cost the firm £300m in operating profit. Naturally, the stock fell on this news, given the financial implications.
Another reason is rising costs and its subsequent cautious outlook. The company, along with many retailers, faces pressure from inflation, particularly wage increases such as National Insurance changes, which are inflating operating costs. UK inflation is rising, which will eat into profit margins.
Finally, the stock used to be undervalued, with a low price-to-earnings ratio. With the move higher over the past couple of years, the ratio has become more balanced. At the moment, it sits at 10.94. I use a figure of 10 as a fair value benchmark. Therefore, there’s little interest in buying the stock now from value hunters seeking cheap shares.
Tempering the view
Despite the recent lack of appreciation, the share price is still up 5% over the last year. It’s not as if the management team is sitting back and relaxing. The company is investing heavily in its physical estate, converting and opening new stores to enhance customer experience and accessibility. It has committed over £300m to revitalise 37 UK locations this year. This includes 16 new stores, 12 food halls, and nine refurbishments. The completion of this should help to drive more traffic through the door and ultimately boost revenue.
If we put the hacking incident to one side, the company is doing well financially. The full-year results out in May showed a profit before tax and adjusting items of £875.5m. This was up 22.2% from last year and the highest in over 15 years. Clearly, the firm still has good momentum.
In reality, I believe the stock is just having a pause from the sharp rally post-pandemic. I don’t think the company has lost its spark. Its expansion plans and strong results show the complete opposite. Of course, the stock isn’t the value pick it once was. Yet even so, I think it can continue to head higher over the coming year. On that basis, I still view it as a stock for investors to consider for their portfolios.
