I will admit that the Marks and Spencer (LSE: MKS) share price has outperformed even my wildest expectations over the past year. The stock has jumped 61% as the company’s fundamentals have dramatically improved.
For example, in the group’s financial quarter ended October 2021, group revenue increased 25%, and net income jumped 338% year-on-year.
This trend continued over the Christmas period. Group sales jumped 18.5% year-on-year over the 13 weeks to the beginning of January. Compared to the same period in 2019, sales increased 8.6%.
To put it another way, Marks and Spencer has recovered from the pandemic and then some.
What I want to know is, can this trend continue or is it too late for me to consider taking a position in the stock?
Headwinds grow
Some analysts might argue that the share price has got ahead of itself.
The UK retail industry faces rising challenges such as cost and wage inflation. Disruption from the e-commerce market is also causing significant difficulties for legacy retailers such as M&S.
In the past, the group has struggled to navigate this changing environment. It looks as if the business is starting to change, but there is no guarantee this trend will continue.
So those are the challenges the company faces. On the other side of the equation, the business has some tremendous opportunities.
Its joint venture with Ocado to supply food at home to consumers has been a tremendous success. The organisation’s food division generated its highest ever Christmas sales in December. M&S products now feature in 30% of baskets ordered from Ocado. Overall, food sales increased 12.4% over the Christmas period.
The company is also expanding its international footprint. Sales increased by 5.1% in global markets over the 13 weeks to the beginning of January. Online sales more than doubled. International expansion could have a lot of promise for M&S.
And management is also using the corporation’s financial windfall to strengthen the group’s balance sheet. With the company expecting full-year profit before tax to be at least £500m, it has been able to repay some outstanding debts, agree on a new revolving credit facility, and make significant investments in its operations.
Share price potential
M&S has fallen behind the competition in recent years because it has not been spending enough. Tired looking stores and a lack of fulfilment infrastructure are just two factors that have held the group back. By investing for growth, the business should be able to overcome these issues.
Management has been spending large sums on reinvigorating stores over the past year. It looks as if these actions are already starting to yield results with sales expanding across the business.
Indeed, in its Christmas update, the company stated that online clothing and home sales “continued to be strong, with growth of 50.8% supported by substantial expansion of in-store fulfilment.“
As the company continues to invest, I think sales can continue to expand. Therefore, I would be happy to buy the stock for my portfolio today, despite its recent performance. As sales grow, the Marks and Spencer share price should continue to reflect the enterprise’s improving outlook.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. 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.
