ii view: M&S sparks interest as recovery play

Clothing sales down, profits down, the dividend down, but the CEO sees potential for recovery.  

Half-year results to 28 September 2019

• Revenue down 2% to £4.86 billion
• Adjusted pre-tax profit down 17.1% to £176.5 million
• Pre-tax profit up 51.5% to £153.5 million
• Net debt down 3.7% to £4.13 billion
• As previously announced, dividend payment down 40% to 3.9p per share

Chief executive Steve Rowe said:

"Our transformation plan is now running at a pace and scale not seen before at Marks & Spencer. For the first time we are beginning to see the potential from the far reaching changes we are making. The Food business is outperforming the market. Our deal to create a joint venture with Ocado is complete and plans to transition to the M&S range are on track.

"In Clothing & Home we are making up for lost time. We are still in the early stages, but we are clear on the issues we need to fix and, after a challenging first half, we are seeing a positive response to this season's contemporary styling and better value product. We have taken decisive action to trade the ranges with improved availability and shorter clearance periods. In some instances dramatic sales uplifts in categories where we have restored value, style and availability illustrate the latent potential and enduring broad appeal of our brand. Our cost reduction and store technology programmes are on track."

ii round-up:

Established in 1884 in Leeds, Marks & Spencer (LSE:MKS) is today an iconic British and overseas retailer. 

Selling its first bra in 1926, its sales are now split between clothing & home and food, with food now accounting for the lion's share of group revenue at just under 57% in 2018. 

Generating just under 10% of sales, its international outlets are divided between owned and franchised stores. Overseas locations include Turkey, Russia, Indonesia and India.  

Earlier this year it announced the creation of a 50/50 joint venture with Ocado (LSE:OCDO), targeting profitable home delivery growth for its food division.

M&S also operates small banking and energy supply businesses. 

For a round-up of these half-year results, please click here. 

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. Half-year clothing and home sales fell by 7.8%. Its premium food offering on the other hand has arguably become a treat for hard pressed consumers. Sales rose by 1.2%. 

As with CEOs before him, the current head 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 to the shareholder payout, a prospective dividend yield of around 6% (not guaranteed) offers appeal. A forward price/earnings (PE) ratio of just under 10 and below the 10-year average of around 11.6 might also offer some enticement. But despite today's above-forecast results, many will need further convincing that the company's recovery is the real deal.

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 5.5% in H1 and 1.9% over 2018
• International operating profit before adjusting items fell 13.2% to £59.9 million
• UK clothing & home online revenue was flat

The average rating of stock market analysts:

Sell