M&S hopes for return to old glories, but has it really turned the corner?

Marks & Spencer showed further signs of recovery yesterday when it reported its first increase in profits since May 1998 and said it had seen no downturn in current trading.

The high street giant reported better-than-expected results for the six months to 29 September, with a 20 per cent increase in profits to £220m. There were no figures on trading in October but the company said the pattern revealed in its second-quarter update a month ago had continued despite the impact of the terrorist attacks in the United States. "We are not seeing any sign of recession in our current trading," Luc Vandevelde, M&S's chairman and chief executive, said.

Mr Vandevelde sounded a hopeful note that M&S may yet return to past glories. "In the last 18 months we have been relaying the foundations of this business and the improvements have finally started to come together. These results are the first evidence that the changes we have made are working," he said.

But has M&S really turned the corner? Mr Vandevelde has become known for his optimistic statements since he joined the company in February last year. He set himself a target of showing significant signs of a turnaround within two years, saying he would not expect to continue if he failed to deliver.

Though still optimistic, his comments contained a greater element of caution. "One quarter of positive trading and one half of increased profit is not good enough to talk about a recovery," he said. "We still have the key Christmas period to go but I would say, so far, so good."

In the City there is an increasing belief that M&S can bounce back and the shares are already the best performer in the FTSE 100 so far this year. Nick Bubb of SG Securities was a long-term bear of M&S but has recently turned bullish. "I think they are definitely turning the corner," he said. "Their clothing market share is recovering and it is pretty clear that October was OK for them."

Mr Bubb has even suggested that M&S could return to its heyday of 1997 and 1998 when it made profits of £1bn-plus within the next three to four years.

Merrill Lynch is also becoming more sympathetic. "M&S now looks to be outperforming the market at last," Katherine Wynne commented. "This is a recovery/momentum story – at the moment it is all pointing in the right direction." The big surprise was M&S's comments on current trading. After rivals such as Debenhams, Arcadia and Matalan had shown a deterioration in performance in October the market was expecting M&S to be similarly affected. Though the company admitted that sales of knitwear and coats had been hit, Merrill Lynch suggested underlying clothing sales in October "were in the low single digits".

This follows last month's trading update when underlying sales in the three months to 29 September were up 2.1 per cent on the same quarter last year. Clothing sales recovered to minus 2 per cent like-for-like from minus 9 per cent the previous quarter. Why has M&S bucked the trend? First, M&S is up against weak comparisons last year which flatters this year's numbers. Secondly, the M&S food business continues to trade strongly with like-for-like sales in the second quarter up by 3.4 per cent.

Thirdly there is the Per Una effect. The new clothing range designed by the former Next chief George Davies was only launched at the end of September but has performed much better than forecasts. Indeed, sales were so strong that M&S had to hold back the expansion into more stores to give Mr Davies a chance to meet demand. Per Una is now in 57 branches and there is a target of 90 by the first week of December.

Can the M&S recovery continue? The variety of initiatives introduced by Mr Vandevelde and the head of UK retail, Roger Holmes, should certainly help though the jury is still out.

The roll-out of Per Una should help to underpin sales growth in clothing as should the continued emphasis on the Perfect range of middle-range classic garments which M&S has been advertising heavily. The revamped store design is being extended and half the store space has now been "renewed" with the uplift still to come from the other half.

Better buying is playing an important part. Three years ago M&S sourced only 30 per cent of its clothing from cheaper overseas markets. That figure is now up to 75 per cent, helping M&S to lift clothing margins by 3 percentage points while still lowering average prices by 3.5 per cent.

In food, M&S has 20 more of its Simply Food convenience store formats planned for next year after the successful two-store trial started in July. However, M&S's food sales growth is still well below that of all the major supermarket operators.

The worries are that a consumer downturn could derail the whole recovery. But Mr Holmes thinks not. "M&S has traded well during recessions in the past. People look to quality and dependability. They look to solid values," he said.

Even so, some analysts believe M&S shares, which rose 10.75p to 312p yesterday, have run ahead of themselves. "We have to remember that these figures are against very weak comparatives," one said.

The downturn has delayed the sale of Brooks Brothers and Kings Super Markets in the United States, which have now been up for sale for seven months. The Kings deal is well advanced but M&S has admitted that Brooks may not be sold by the end of its financial year in March. The sale price is bound to be affected by the downturn in the US economy, which pushed Brooks Brothers to a £800,000 loss in the first half.

However, the company insisted the delay would not affect its plans to return £2bn to shareholders next March.

Mr Vandevelde said he had no immediate plans to hand over the chief executive position to Mr Holmes. "It is much too early to start making any organisational changes," he said.

Certainly his own job looks more secure than it has done for some time.