ii view: M&S shares crash 11%

M&S shares give back their recent gains and trade below 200p again. Here's why.  

Third-quarter trading update to 28 December 2019

• Total group sales down 0.7%
• Clothing & home like-for-like (LFL) sales down 1.7%
• Total clothing & home sales down 3.7%
• Food LFL sales up 1.4%
• Full-year guidance unchanged - gross margins to be around the lower end of guidance

Chief executive Steve Rowe said:

"We delivered an improved performance in Q3 across both main businesses. The Food business continued to outperform the market and Clothing and Home had a strong start to the quarter, albeit this was followed by a challenging trading environment in the lead up to Christmas. As we drive a faster pace of change, disappointing one-off issues - notably waste and supply chain in the Food business, the shape of buy in Menswear and performance in our Gifting categories - held us back from delivering a stronger result. However, the changes we made earlier in the year in Clothing have arrested the worst of the issues of the first six months and we are progressively building a much stronger team for the future."

ii round-up:

The latest Christmas trading update from Marks & Spencer (LSE:MKS) followed a now familiar pattern. Food sales exceeded forecasts while figures for the clothing and home businesses disappointed.  

Having raised investor hopes at half-year numbers in early November, pointing to positive October trends, weak gifting sales in December and struggling menswear following a decision to shift the range towards slim-fit products, dented performance this time. 

The shares fell by more than 11% at one stage in morning trade, having rallied over 10% since the interim results. 

Third-quarter same store clothing and home sales fell by 1.7%, better than the 5.5% fall suffered in the first half, but below expectation for a decline of less than 1%.

Food sales on a similar basis rose by 1.4%, surpassing forecasts and contrasting with more challenged numbers reported by Tesco (LSE:TSCO), Morrisons (LSE:MRW) and Sainsbury's (LSE:SBRY). 

Management’s accompanying full-year profit comments also failed to reassure. Guidance remains unchanged, although cost cutting is struggling to offset bottom-of-the-range gross margins. Analyst estimates are now expected to be shaved lower. 

ii view:

Marks & Spencer has become a business of contrasting fortunes. Its clothing & home business has struggled to attract younger more fashion conscious shoppes who are keen to spend, 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.

As with chief executives before him, the current head Steve Rowe is attempting to implement several growth initiatives. Non-performing stores are being closed, a catch-up of its digital outlet with rivals such as Next (LSE:NXT) continues to be pushed, while its international business remains under constant readjustment and rebuild. 

For investors, and in the wake of a 40% cut, a prospective dividend yield of just under 5% still offers appeal. A forward price/earnings (PE) ratio of under 12 is hardly excessive, too, although it is above the three-year average of 10x. Any post-election government spending boost would also help the economy and consumer, while Marks has in the past proven subject to takeover speculation. However, and despite attempts by numerous chief executives, until M&S can inject a convincing recovery into its clothing sales, the shares may remain unpredictable. 

Positives: 

• Targeting cost savings of at least £350 million by 2020/2021
• Ocado Joint Venture gives it a scalable presence in online grocery
• Attractive dividend payment

Negatives:

• Same store clothing & home sales fell by 1.7% and 1.9% over 2018
• Half-year net debt of £4.13 billion compares to a stock market value of £3.86 billion
• Third quarter international sales fell 2.3%

The average rating of stock market analysts:

Sell