Marks & Spencer: Record performance, cyber-attack. What next for investors?

Marks & Spencer reported strong full-year results, with adjusted pre-tax profit at £876 million and a 20% dividend increase, driven by robust food and clothing sales growth and margin improvements. However, a recent cyber attack is expected to negatively impact short-term earnings by £300 million, primarily affecting online clothing sales. Despite this setback, analysts forecast a profit rebound in FY27 to £990 million, and suggest the underlying fundamentals of M&S remain strong, presenting a potential buying opportunity for long-term investors.

Analysis

Marks & Spencer has reported a record financial performance for the year to March, with adjusted pre-tax profit reaching £876 million, approximately 5% ahead of expectations and significantly above both Deutsche Bank's £850 million estimate and the market consensus of £840 million. This strong result was underpinned by earnings per share rising to 31.9p and a 20% increase in the dividend to 3.6p. The Food division was a key driver, with like-for-like sales up 8.6%, full-year revenue of £9 billion, and operating profit increasing 25% to £484 million, achieving a 5.4% margin. The Clothing division also performed well, with sales rising 3.5% to £4.2 billion, like-for-like sales up 4.4% for the year (5.9% in Q4), and profit margins improving to 11.2%, exceeding forecasts. The company's balance sheet strengthened, ending the year with £440 million in net cash (excluding leases) and generating £443 million in free cash flow. However, these positive results are tempered by a significant cyber-attack, which is expected to cause a £300 million impact on earnings, split between £100 million in food (wastage) and £200 million in clothing (lost sales), with online clothing sales not anticipated to fully recover until August. Deutsche Bank estimates this equates to £20–£25 million per week in costs. Despite this, only £100 million of the loss has been incurred so far, suggesting a potentially less severe outcome. In response, and as part of ongoing strategy, capital expenditure will rise to £600–£650 million this year, up from a £540 million forecast, partly for IT upgrades but largely justified by improved returns on growth investment. Shore Capital's pro-forma forecasts, excluding the disruption, had indicated M&S was on track for £935 million in adjusted pre-tax profit in FY26. Due to the attack, reported profit is now expected to fall to £632 million (EPS 21.7p) in FY26, but analysts project a strong rebound in FY27 to £990 million profit and 34.4p EPS. At 368p, the stock trades at just over 10 times expected FY27 earnings, which analysts like Deutsche Bank consider attractive given sound fundamentals.

Key Decisions for Investors

• Investors with a medium to long-term horizon may consider the current share price weakness, induced by the cyber-attack's short-term earnings impact, as a potential opportunity to build or increase positions, given the company's strong underlying operational performance and positive FY27 profit outlook.
• Monitor the company's progress in recovering from the cyber-attack, particularly the restoration of online clothing sales by the August target, and the effective deployment of increased capital expenditure on IT infrastructure and growth initiatives.
• Evaluate the forthcoming earnings reports for confirmation of the projected rebound in FY27, and assess whether the one-off nature of the cyber-attack costs is accurately reflected, allowing the company's fundamental growth trajectory to re-emerge.