Profits jump

Fuelled by the recovery from the pandemic and a transformation plan, pre-tax profit and adjusting items came in at £269.4m over the 26 weeks to 2 October. That’s almost 53% up on that achieved over roughly the same period in the pre-pandemic 2019/20 financial year. It’s also above the £205m-£264m range predicted by analysts.

Although hard to ascertain whether growth was down to the company’s efforts to transform the business or the recovery in consumer spending following multiple lockdowns, food sales rose 10.4% over the period. Elsewhere, Marks’s long-derided Clothing and Home (C&H) division recorded a 17.3% rise in full-price sales and increased market share. No less than 34.4% of total sales from this part of Marks and Spencer now come from online.   

It gets better. Looking ahead, the retailer said that trading in the first four weeks of H2 had been “consistent with growth rates reported in Q2 and ahead of plan”. As a result, it expects recent demand “to be sustained in the near term” and is now targeting full-year pre-tax profit and adjusting items to be ahead of previous expectations at roughly £500m.

Contrarian pick

Today’s jump in the Marks and Spencer share price builds on the momentum seen over the last 12 months. In that time (and taking this morning’s move into account), the stock has climbed 87% in value. That’s an excellent result and provides evidence of how potentially lucrative contrarian investing can be.

Despite this recovery, MKS still traded on a valuation of 13 times earnings before traders sat down at their desks this morning. That looks fairly reasonable relative to industry peers. Next, for example, trades on 16 times forecast earnings and lacks Marks’s earnings diversification. It also looks reasonable considering the former’s plan to open 20 new stores and the progress made in reducing its debt pile. This now sits at £3.15bn, down from a little over £4bn in 2019/20.

Regardless of today’s move, the Marks and Spencer share price remains almost 30% below where it stood in 2016. To make matters worse, the company isn’t paying a dividend. Now, I’m more than willing to wait for a stock to recover. Even so, I would prefer to be receiving some form of compensation for my patience in the meantime. For me, this is easily one of the biggest issues with buying MKS stock now.

Unfortunately, the return of payouts looks some way off due to inflationary pressures. Throw in Covid-19-related obstacles, Brexit, supply chain concerns and old-fashioned competition and MKS is far from the home run today’s rise might suggest.

More upside ahead

Based on today’s report, however, it really does feel like this company is starting to get its mojo back. Assuming it has a positive festive period, I’m confident there’s more upside ahead for the Marks and Spencer share price.

Notwithstanding this, it’s clear that I shouldn’t get carried away given the multiple headwinds the company still faces. So, if I were to buy today, I’d definitely ensure that I was suitably diversified beforehand.

The post The Marks and Spencer (MKS) share price is flying! Here’s why appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What caused this enormous spike? And should I be adding this business to my watch list?

The surging Superdry share price

The collapse of the Superdry share price in 2017 serves as an excellent example of a company expanding its reach but ultimately failing to retain its market share. Given the difficulty of succeeding in the fashion industry, this is not an uncommon story.

But is the recent surge in share price a sign that Superdry is making a comeback? Maybe. The primary driver behind this boost is the publication of its full-year results between April 2020 and April 2021. As expected, total revenue took quite a big hit. It continued its decline from £704.4m to £556.6m or a 21% reduction. Obviously, this wasn’t good news. So why did the share price go up by so much?

While the overall revenue dropped, a closer inspection did show some encouraging signs. E-commerce has slowly gained popularity within the fashion space and companies like Boohoo and ASOS have successfully managed to take advantage of it. But selling clothes online is something that Superdry has struggled to adapt to and is likely a contributing factor to its fall from grace among consumers.

Yet last year, online sales grew considerably from £151.6m to £202.9m year-on-year. As such, e-tail now represents around 36% of the total revenue stream. By comparison, in 2018, this figure was closer to 18%. The boost resulted in revenue for the fourth quarter growing, albeit by only 0.8%. And that looks like it could be the start of a turnaround, so investors went into a buying frenzy, causing the Superdry share price to explode.

What’s next for the business?

Seeing e-commerce become a more prominent part of Superdry’s revenue model is an encouraging sign to me. Why? Because strength in online sales really is crucial to the future of fashion retail.

Having said that, it’s hardly free from risk. We’ve already seen what happens when a clothing brand loses its popularity. And with many of its stores being closed throughout the majority of 2020, it’s difficult to discern whether the growth in online sales is sustainable in a post-pandemic world.

The bottom line

With high street footfall back on the rise as lockdown restrictions begin to ease, Superdry looks like it’s in a good position to start seeing growth again in its physical stores. But today, fashion missteps can seriously dent a brand’s appeal. And looking at its track record, the company, in recent years, has failed to keep up.

Personally, this isn’t a business I’m interested in owning, so I won’t be adding any shares to my portfolio. But what if Superdry can increase its online strength and recapture consumers for its brand? In that case, I do believe its share price could perhaps one day return to its highs of 1,900p. Whether that will happen, only time will tell.

The post Why did the Superdry share price explode last week? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Superdry. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.