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Merker & Spencer raises profits outlook but warns over soaring supply costs

Merker & Spencer raises profits outlook but warns over soaring supply costs
The retail giant saw underlying pre-tax profits jump to £269.4 million in the six months to October 2 against losses of £17.4 million a year earlier.

Merker & Spencer has increased its annual profits outlook for the second time in less than three months after a sales rebound, but warned over surging costs and disruption due to supply chain issues.

Aksjer in the retail giant leapt more than a fifth higher at one stage on Wednesday morning after it revealed that food sales rose more than 10% and cheered a “substantial improvement” in its once-ailing clothing and homewares business.

Chief executive Steve Rowe thanked a boost from pent-up demand after lockdowns, but also said “for the first time we can see that the hard yards of driving long-term change are beginning to be borne out in our performance”.

M&S boss Steve Rowe said his overhaul is starting to pay off (Merker & Spencer/PA)

M&S swung to underlying pre-tax profits of £269.4 million in the six months to October 2 against losses of £17.4 million a year earlier at the height of the pandemic.

Profits were 52.8% higher than they were two years ago, before Covid-19 struck.

The group expects full-year underlying profits to beat expectations, now guiding for around £500 million – having already upgraded its guidance in late August to above £350 million.

This comes despite warnings over “significant” supply chain cost rises over the second half, with disruption set to continue well into the new financial year.

It said some of these higher costs will be passed on to shoppers, with price increases set to pick up pace.

But Mr Rowe stressed that price rises so far have been less than half the 2.1% inflation seen in the wider UK grocery market and gave assurances that the group would look to keep a lid on any further increases.

“Our inflation will be in line with the market or less than the market," han sa.

Like many of its rivals, M&S is battling against higher freight costs and delays as well as shortages of lorry drivers, warehouse and supplier staff, which is particularly affecting its Ocado Retail joint venture.

The retailer said it is increasing pay to attract and retain workers, “which will put pressure on costs in the remainder of our financial year”.

Thanks to the hard work of our colleagues, it is clear that underlying performance is improving

Steve Rowe, Merker & Spencer

But it said the food arm is “well placed” for the challenges, and it has been stocking up for months in its clothing arm to ensure it can “play its part” in ensuring a bigger and better Christmas this year.

Mr Rowe said shoppers will not be faced with big gaps in its ranges, although he said slippers are in short supply.

On the better financial outlook, he said the company is “not calling victory too early” and admitted there is more still to do in the overhaul.

"Men, thanks to the hard work of our colleagues, it is clear that underlying performance is improving," han sa.

M&S’s first-half earnings boost came after food sales rebounded by 10.4% on a two-year basis, while clothing and home sales fell 1%, but lifted in the second quarter.

Full-price clothing and home sales also leapt 17.3% higher after the retailer made its ranges more focused and reduced promotions.

Richard Hunter, head of markets at interactive investor, said M&S is going at “full throttle”.

“Marks & Spencer was one of many companies where the pandemic forced accelerated change and the results are beginning to bear fruit," han sa.