Can strong earnings lift the Marks & Spencer share price?

The M&S share price has sunk amid fears that consumer confidence will fall as a result of rising inflation, but promising annual earnings for 2021–22 could provide a much-needed boost.

Marks & Spencer [MKS.L] is forecast to report a 1,154% increase in profits before tax when it releases its full-year earnings on 25 May.

According to analysts’ consensus estimates reported by Reuters, the retailer is tipped to report pre-tax profits of £522m for the year ending 2 April. That compares with a figure of just £41.6m in 2021, when profits were heavily impacted by the pandemic. It also represents an increase of nearly 30% from 2020.

Despite strong year-over-year growth forecast for fiscal 2022, the M&S share price has fallen down 41% since the start of the year to close at 136.5p on Monday 23 May. The company has warned that rising inflation could impact both its food and clothing business, with CFO Eoin Tonge calling price rises “inevitable” in January.

Strong sales forecast for fiscal 2022

Total UK clothing and homeware sales are expected to climb 46.6% from 2021, with food sales up 10.3% over the same period.

The group has been helped by the return of shoppers to the high streets, as well as the continued growth of its online food tie-up with Ocado [OCDO.L].

M&S has also seen a lift in international sales, girls’ clothing and activewear, and its new digital-first clothing brand, Jaeger.

This week’s full-year update will follow strong half-year results, when the company reported pre-tax profits of £269.4m, up from £176.3m in the same period in 2020. Food sales rose 10% with clothing and homeware down 1%. However, online clothing and homeware climbed 60.8%.

Management challenges

The 25 May results will mark CEO Steve Rowe’s last day in the top job after six years. He will be replaced by Stuart Machin, who will take on the everyday leadership of the business, and Katie Bickerstaffe, who will become co-CEO with a focus on driving omnichannel, digital and data growth.

Analysts will be keen to hear more about how the dual approach will work on a day-to-day level and strategically. They will also want to get the new leadership’s take on some of the pressing challenges facing UK consumers, particularly given inflation reached a 40-year high of 9% in April.

Consumers are seeing rising energy bills among other cost hikes and are showing subdued confidence over the state of the UK and global economy, given the war in Ukraine. This is likely to impact the way many households choose to shop, as well as pushing retailers to charge higher prices as operating costs rise.

M&S chairman Archie Norman recently told the BBC that exporting food to Ireland now took one-third more driver time and required the employment of 13 vets in Scotland to oversee paperwork and checks, costing the group an additional £30m.

Following last month’s news that M&S was cutting prices on 60 everyday items in its value range in order to help households afford staple goods, investors and consumers alike will be keen to hear if the retailer has any further changes to announce in this week’s update.

The outlook for the M&S share price

According to 23 analysts polled by MarketScreener, Marks & Spencer has a consensus ‘outperform’ rating and a target price of 212.14p, representing a 55.4% upside on the 23 May closing price.

Barclays has a 215p price target for the stock and believes it could keep performing well even amid inflationary pressures, as it is “more in the quality than price camp within the retail sector”. The bank maintained its ‘overweight’ rating on M&S stock at the beginning of this month. Barclays expects annual profit of £525m for fiscal 2022, but warned that it is likely to fall in 2023 due to the withdrawal of business rates relief, a lower contribution from Ocado and the impact of closures of its Russian franchises on international sales.