Denim, dresses and more affordable food help lift sales and profits at M&S

Strong sales of denim, dresses and office wear as well as more affordable food have lifted profits at Marks & Spencer, with the retailer promising to restart dividend payments for the first time since the pandemic.

M&S plans to restore a “modest” annual payment to shareholders, starting with an interim dividend in November, after underlying pre-tax profits rose by 21% to £476m in the year to 1 April, with sales increasing 9.6% to nearly £12bn.

The news sent shares up almost 12%, helping lift the company’s market value above that of its online grocery partner Ocado for the first time in five years. Ocado, once seen as the future of food retail, is expected to drop out of the FTSE 100 index of leading stock market companies when it is updated next week.

Performance at M&S was boosted by clothing sales, with casual dresses up 40%, chinos up 25% and the pricier Autograph range, which includes suits and formalwear, up 40%. The disappearance from Britain’s high streets of Gap and Topshop left an opening for M&S to grow its share of the denim market, from less than 10% to 13%.

The company said it had made changes to its ranges, taken a hit on profit margins to hold down prices relative to rivals, and improved clothing styles.

Sales of its Remarksable budget food range increased by 40% during the year as M&S tried to reduce the impact of soaring inflation on basics such as milk, butter and bread.

M&S last paid a dividend in January 2020. It saved £210m by scrapping the payout to shareholders during the first lockdown, telling investors it needed to conserve cash in order to trade its way through the pandemic.

The chief executive, Stuart Machin, said the number of clothing and food items sold had risen, in contrast to many other retailers, helping increase market share.

Machin said it was right the government was “asking questions and thinking responsibly” about what was driving high food inflation. However, he added that he had not seen evidence of “greedflation” – whereby companies increase profit margins by raising prices unnecessarily high.

He said: “The inflation we have had was driven by commodity prices, energy prices and wage inflation which is still really significant throughout the whole supply chain. It has hit us as a retailer more than we have ever experienced.”

The company warned of a challenging year ahead, saying it expected only a modest rise in sales and a fall in profits of up to £10m as costs continued to increase. M&S expects to spend £100m more on staff wages and £50m on energy.

Machin said the retailer was also likely to have to take a further hit on profit margins to protect shoppers from cost increases, which he expected to continue into the second half of the year although he said inflation was likely to ease over that period.

M&S said its inflationary pressures would be offset by cost-saving measures such as providing facilities for no-contact returns in stores and more automated tills after installing 800 more of the units including in clothing sections over the past year.

The group also closed six full-line stores and two discount outlets over the past year. This year it plans to permanently close 10 stores, as already announced, and relocate 10 more including large stores in Liverpool, Leeds, Manchester, Birmingham and Thurrock.

Pre-tax profits fell by nearly 8% to £482m after losing one-off benefits from the previous year including almost £60m of pandemic business rates relief.

Clothing and homewares sales soared by 11.5% to £3.72bn, including a 4.8% rise in online sales despite a wider market retreat in orders for home delivery. Food sales rose 8.7% to £7.22bn.

Related: When it comes to fashion, M&S is on the right wavelength

The group’s Ocado Retail joint-venture, which sells groceries online, was a fly in the ointment, however, diving £59m into the red. M&S made a loss of £29.5m from its share in the business, down from a profit of £13.9m a year before, as total sales fell by 1.2% to £2.22bn.

Machin said it had been “a strong year despite the headwinds” and that profits had risen even though the retailer had not passed on the “full force of cost increases” to customers on either food or clothing.

“Our food and clothing and home businesses invested in value to protect customers from the full force of inflation, which, while impacting margin, was the right thing to do, as serving our customers well is the only route to delivering for our shareholders,” he said.