Digital Investments And Supply Chain Efficiencies Will Improve Future Performance

Key Takeaways

• Strategic store expansion and digital investment could boost revenue through improved retail presence and increased online sales.
  
• Supply chain modernization and cost reduction efforts aim to enhance net margins and overall earnings.
  
• Significant challenges across international segments, digital investment pressures, and delayed infrastructure upgrades may hinder profitability and margin growth.

Catalysts

Operates various retail stores.

• Marks & Spencer’s focus on store rotation and acquiring new sites in high-growth locations indicates a future increase in revenue potential from improved retail presence and customer reach.
  
• The strategic investment in digital and technology initiatives is expected to enhance the online shopping experience, increasing digital sales and potentially raising overall revenue from the online segment.
  
• The company's plan to modernize its supply chain aims to create lower-cost and faster operations, which could enhance net margins through increased efficiency and reduced operational costs.
  
• Ongoing international business resets and leadership strengthening are expected to stabilize overseas performance, potentially reversing current declines and contributing to future revenue growth.
  
• The structural cost reduction program targeting £500 million savings by FY '28 should lower operational expenses, thereby improving net margins and enhancing overall earnings.

Marks and Spencer Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marks and Spencer Group's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 4.8% in 3 years time.
• Analysts expect earnings to reach £715.8 million (and earnings per share of £0.35) by about December 2027, up from £505.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2027 earnings, down from 15.4x today. This future PE is lower than the current PE for the GB Consumer Retailing industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.39%, as per the Simply Wall St company report.

Marks and Spencer Group Future Earnings Per Share Growth

Risks

• The International business showed a disappointing performance, with sales down 10% and a reduced operating profit margin, which could negatively impact global revenues and margin growth.
  
• The Clothing & Home segment experienced increased operating costs as a percentage of sales due to lower online margins, which could pressure overall earnings despite store margin gains.
  
• The reset actions in International and increased investment requirements to improve digital and technology infrastructure suggest continued higher expenses, potentially impacting net margins.
  
• Ocado Retail, while showing growth, continues to operate at a loss, constraining overall group profitability and indicating risks to future earnings from this partnership.
  
• Store rotation and infrastructure upgrades have not progressed as quickly as planned, which may prolong cost pressures and affect potential returns on capital, impacting future profitability.

Valuation

• The analysts have a consensus price target of £4.33 for Marks and Spencer Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.75, and the most bearish reporting a price target of just £3.42.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £14.9 billion, earnings will come to £715.8 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 6.4%.
• Given the current share price of £3.86, the analyst's price target of £4.33 is 10.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.