Marks and Spencer shares: The view prior to its 2020/21 FY results

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• £43m pre-tax profit forecast for 2020/21
• 34% year-on-year fall in clothing and homeware sales
• CEO Steve Rowe pleased to have prevailed in “fixing the basics” for M&S long-term
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Will anticipated year-on-year profit decline hit Marks & Spencer shares hard?

Marks & Spencer is set to report pre-tax profits of just £43m for its 2020/21 trading year. The pandemic-hit year is expected to result in a 90% year-on-year (YoY) decline in profits for one of the UK’s oldest names in retail.

Marks & Spencer posted pre-tax profits of £403m in the previous year. However, the writing was on the wall late last year when the company posted its first H1 loss since being a publicly listed company.

The second half of 2020/21 saw the easing of the UK’s third nationwide lockdown, which has helped not only to bring clarity to the future of M&S stores, but confidence back into the Marks & Spencer share price too. Year-to-date growth of more than 17% from 131.40p to 154.65p as of Monday, 24 May suggests that investors may have already priced in the group’s turbulent 2020/21 trading figures.

What has affected Marks & Spencer most during the Covid-19 pandemic?

All leading retailers across the UK have been hit hard by the Covid-19 crisis. Next saw its full-year profits plunge 53% YoY, while Primark also saw annual profits hit by 90% YoY, which affected the share price of Associated British Foods hard.

Marks & Spencer is clearly no different in this regard, with YoY clothing and homeware sales driving the downturn with forecasted 34% declines as a consequence of the multiple Covid-19 lockdowns. The group’s non-food profits have been only marginally offset by a 1.2% YoY improvement in food sales.

Unlike some retailers, Marks & Spencer also opted to retain its multi-million-pound business rates relief from the worst of the pandemic.

Is CEO Steve Rowe the man to lead M&S firmly into the 21st century?

It’s a far cry from 1998 when Marks & Spencer became the UK’s first retailer to post full-year pre-tax profits of more than £1bn. The group replicated this achievement in 2008 before the global recession.

Chairman Archie Norman and CEO Steve Rowe are the men at the helm, tasked with steering M&S firmly into the 21st century. Norman described 2020/21 as a ‘lost year’ for the firm, however, the duo quickly opted to condense three years of changes into a single year to address its operational weaknesses.

This included more than 7,000 job cuts, the closing of poor-performing high-street stores, and a long-overdue focus on online food shopping. Its new partnership with Ocado is already starting to bear fruit. Analysts at Berenberg believe M&S’ stake in Ocado alone is now worth 0.60p a share, which is not reflected in the Marks & Spencer share price.

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