Interactive Investor

M&S shares dive after grim quarter

11th July 2017 12:42

David Brenchley from interactive investor

Marks and Spencer is certainly making strides in its bid to drive sales and promotions out of the business. Unfortunately, while it sold 7% more of its clothes at full price during the first quarter, like-for-like sales still fell and, more worryingly, the once solid food business did worse than expected.

It's why M&S's share price is down over 4% Tuesday at its lowest since late March. New chief executive and M&S lifer Steve Rowe last year set out a five-year plan he hopes will turn the firm's fortunes around. On these numbers, it's very much a work in progress.

Like-for-like clothing & home revenue fell 1.2% to £852 million in the 13 weeks to 1 July. That's better than the 5.9% slump at the end of 2016, but the City had wanted more.

True, Rowe has made a start at stemming the flow of falling clothes sales, but there's clearly much to do, and benefits are likely to be weighted to the latter years of the plan.

New chairman Archie Norman - formerly of Asda, Kingfisher and ITV - and clothing boss Jill McDonald - ex CEO at Halfords - due to join in the autumn, can't arrive quick enough.

Food sales in the first quarter were the big disappointment, though, down 0.1% like-for-like at £1.4 billion, and falling for a second successive quarter. Many had expected growth of around 1% or more. There's increasingly stiff competition from Sainsbury's and Tesco, who both reported positive like-for-like growth recently. Tesco's new £10 finest Meal Deal is also a direct threat to M&S's popular dine-in deals.

M&S must "keep re-invigorating its food offer" in order to keep up and retain customers, argues Himanshu Pal, vice president at Kantar Retail. It won't be easy, though, given an increasingly difficult economy as inflation and stagnant wage growth combine to keep pressure shoppers' wallets.

The good news is that full-price clothing sales were up around 7%, helped by a reduction in the number of promotions and no clearance sale in the quarter. Its August sale is going, too. Tuesday sees the start of M&S's summer sale, a week later than usual, but there's a significant reduction in stock included.

Rowe remains confident and claims his recovery plan is on track. Full-year guidance remains unchanged, with consensus expectations for full-year 2018 pre-tax profit of £584 million, down 5% year-on-year.

Shares dive

Just seven weeks ago, investors appeared to be gaining confidence in Marks. Shares were a whisker below 400p late May, a one-year high, after final results beat expectations, although they were hardly knockout numbers. The shares are down 19% since.

As ever, analysts are split. Cantor Fitzgerald's Mark Photiades and Kate Calvert at Investec are sellers, with price targets set at 300p and 295p respectively.

With consensus earnings per share (EPS) forecasts for 2018 at 28.2p, the stock trades on a forward price/earnings (PE) ratio of 11.5 times. That's still not a compelling valuation, according to Calvert.

"M&S is playing catch up in a difficult mid-market position," she explains. "Shares [are] expected to underperform until we see evidence of a sustainable recovery."

Liberum's Adam Tomlinson is a seller, too, with a target of 250p. However, he might "reappraise M&S's investment case" if strategic initiatives keep delivering improvement across the business."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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