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Earnings season: Marks and Spencer sales fizz, but will its share price do so too?

Front view of a mixed-race couple walking past a shop window and looking in.

When it comes to retail firms, Marks and Spencer (LSE:MKS) has been bucking the downwards trend recently. Its latest earnings figures for the crucial Christmas period, released today, highlight that it has continued to outperform the market. Indeed, its share price has risen 48% in just three months. Should I jump on the bandwagon in the hope of further price appreciation?

Christmas trading

For the 13 weeks to 31 December, total sales grew 9.7%. On a like-for-like basis, the figure came in at 7.2%. The shining beacon was Food, where sales were up 10.2%, comfortably outpacing rises at its more established rivals.

The investment it made in its Remarksable range was particularly strong. Anchored at the more value end of its food offering, it accounted for over 20% of baskets. Alongside this, top-tier M&S Collection sales grew by over 20%.

On 23 December it generated its biggest-ever sales of over £80m. This was down to improved availability and strong sell-through of seasonal lines including turkeys.

It was a similar story over in Clothing & Home where sales increased 8.8%. This division achieved over 10% market share in the period. Particularly pleasing was to see its physical stores business doing so well, with store sales up 12.8%.

A leaner M&S

The M&S share price has been on a long, slow move downwards for the best part of a decade. A changing external retail environment, poor management decisions and a failure to move quickly with the times, resulted in it being demoted from the FTSE 100. But is a turnaround in the making?

I recently visited M&S’s flagship store near where I live, and hardly recognised the place. This is all part of a larger strategy in store rotation – opening new stores and closing old ones. Hardly revolutionary, but management clearly believes that the store business model is far from dead.

The big jump, however, has been the ramp up in its online offering. On average, it’s roughly as profitable as its traditional stores business. It has invested heavily in technology, data and digital initiatives in order to support third-party brands and higher marketing.

Return to former glory?

For me, any investment must be predicated on a belief that M&S can re-establish itself as a market leader.

Its brand strength goes without saying. In the present inflationary environment, it has an edge over its competitors. A significant portion of its customer base is either retired with no mortgage or employed with an above average salary. This fact is likely to be a big driver for future food sales growth.

But what about the all-important clothing market? In its half-year results, it reported a 14% increase in sales on this front. This was driven by volume growth, price inflation and product mix.

The growth in third-party brands is clearly welcome. But with it brings problems that online-only businesses suffer from – the cost of servicing higher return rates.

Also, its cost base remains stubbornly high. The purchase of Gist should help to bring costs down in its supply chain, at least. But maintaining such a large store estate while also trying to grow its online offering is likely to weigh on the balance sheet for some time.

On balance, I believe there are better opportunities for my money at the present time.

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Andrew Mackie 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.