M&S CEO Steve Rowe

Shares in M&S rocketed to two-year highs this week, after the second profit forecast hike of the year helped convince the City its latest attempt to turn around fortunes might finally be the real deal.

Revenues in the 26 weeks to 2 October increased 5% to £5.1bn compared to the same period in the 2019/20 financial year, before the pandemic hit. Food sales surged 10.4%, while clothing and home sales returned close to pre-pandemic levels after falling 1%.

There is no doubt food remains the star performer, with M&S half-year food sales soaring by 16.9% after adjusting for the hit to the hospitality and franchise travel parts of the business.

Meanwhile, the retailer’s partnership with Ocado slipped back slightly after the highs of the first national lockdown a year ago. Customer orders grew by approximately 19%, but revenue declined 2.7% over the 26 weeks ended 29 August 2021 as average basket size fell from £151 to £124. Figures were also impacted by a fire at Ocado’s Erith CFC on 16 July, which hit revenues by 19% in the final seven weeks of the period.

Notably online growth mitigated the predicted slump in in-store clothing & home sales, with e-commerce revenues up 19.7% year on year and up 60.8% compared to pre-pandemic levels.

The strong sales lifted M&S back into the black, with a pre-tax profit of £187.3m, compared to a £87.6m loss a year ago and pre-pandemic profits of £158.8m. The retailer said consumer demand remained high as the second half got underway, leading to an upgrade in profit forecasts. A bottom line in the region of £500m is now expected following a surprise upgrade earlier in the summer to around £350m.

“Something spectacular must have happened since August for Marks & Spencer to upgrade earnings guidance once again,” noted broker AJ Bell. “Food sales are doing incredibly well… It has really nailed the proposition with decent quality products and an ever-widening range of items.”

Shore Capital commented: “The M&S transformation has been some years in the making, planning and implementation… Immediately ahead, M&S Food must navigate Christmas in the face of considerable operational challenges, albeit a core UK customer base in quite good financial shape and primed for a good time.”

Jefferies concurred that M&S was well placed to ride out short-term challenges: “The market will debate the extent to which progress could be endangered by tighter household budgets in 2022. But the food business should benefit from strengthened value perceptions and multi-channel execution is a world away from the struggles of the past.”

M&S shares soared 16.5% to 226.5p on Wednesday, hitting a multi-year high of 235.5p in the process. The shares are now up by more than 90% year on year and by around 140% since falling below 100p during the first Covid lockdown.