ii view: M&S scraps dividend to save cash

A battle to revive clothing sales is now compounded by the coronavirus. Where now for investors?

Trading update and impact of Covid-19

• Profit for current year at or below bottom end of £440-£460 million range
• Not anticipating paying a final dividend for current year
• Too early for sales and profit guidance for the next financial year
• Available liquidity £1.34 billion

ii round-up:

In an unexpected announcement, clothing and food retailer Marks & Spencer (LSE:MKS) updated investors on the deepening corona crisis.

For the current financial year end to 31 March 2020, profit had been on track until only this week. A figure at or below £440 million is now expected.

Over the coming nine to 12 months, substantial sales declines for its Clothing and Home and International businesses are likely, leaving management unable to offer any accurate guidance for the next financial year. 

M&S shares fell by more than 7% in afternoon UK trading, making for a near halving in the price year-to-date.

The prospect of corona-hit deserted high streets has seen rival retailers such as WH Smith (LSE:SMWH) and JD Sports Fashion (LSE:JD.) more than halve so far in 2020. M&S arch-rival Next (LSE:NXT) is also down over 40%.

Given the degree of uncertainty and the possibility of temporary store closures, management detailed a number of protective measures. These include the likelihood of not paying a final dividend for this year, reducing capital expenditure and reducing clothing supply by over £100 million. 

Closed clothing stores also offer opportunity for M&S to focus down on growing its online business and honing its new 50:50 partnership with online grocer Ocado (LSE:OCDO).  

Full-year results are scheduled for 20 May 2020. 

ii view:

Marks & Spencer has become a business of contrasting fortunes. Its clothing & home business has struggled to attract the younger more fashion conscious and keen to spend consumer, leaving it reliant on an ageing and slowly dwindling demographic. Its premium food offering on the other hand has arguably become a treat for hard-pressed consumers, particularly at Christmas.

The corona crisis also appears to underline its dual product offering. While clothing and home goods are not now a priority, food and stripped shelves at rival grocers such as Tesco (LSE:TSCO) and Sainsbury's (LSE:SBRY) leave food a high priority under potential lockdown conditions. 

For investors, the likely loss of the final dividend payment removes a major attraction as the retailer battles to return to its former glories now under the added weight of the corona crisis. On the upside, online partner Ocado has fared well during the virus outbreak, and one must assume that M&S online will do brisk business as long as deliveries remain possible.

Positives: 

• Taking action to conserve cash
• Ocado Joint Venture gives it a scalable presence in online grocery

Negatives:

• Final dividend payment likely to be omitted
• The battle to revive its clothing sales is ongoing

The average rating of stock market analysts:

Hold