St Michael
When I looked at Marks & Spencer Group (LSE: MKS) (NASDAQOTH: MAKSY.US) in October last year, I concluded that Britain’s once-favourite retailer was a sandwich short of a buy. Fashion makeover after makeover had failed. Its foray into premium banking would prove an uphill struggle, I predicted, as customers are notoriously reluctant to switch current accounts. I was taken by its 4.3% yield, but decided, on balance, to stick to its sandwiches. Should I buy it today?
Marks & Spencer has put in a healthy share price shift over recent years. It is up nearly 20% since I reviewed it last year, against 13% for the FTSE 100 as a whole. It is up 43% over three years against 25% for the index. So forget what you read about the demise of frowsty old M&S — as far as investors are concerned, this stock is cutting-edge.
Seasonal performer
Yet it is still fumbling its fashion, with a year-on-year 0.9% drop in clothing sales, in the 24 weeks to 7 July, according to latest figures from Kantar Worldpanel, although that marks an improvement on the 3% drop in the 24 weeks to 9 June. That offered some respite for chief executive Mark Bolland, who has spearheaded the clothing division overhaul, but it doesn’t look so good compared to the 4.2% rise in sales at rivals Debenhams and 2% at Next, up from 3.6% and 0.8% respectively. News that M&S is shutting four stores in the Republic of Ireland and shedding 180 jobs also hit investor sentiment.
Recent M&S clothing performance may lack in style, but it has other virtues. Sales at M&S.com rose nearly 30% in Q1, international sales rose 8.7% and food sales rose 4.5%, taking total group sales growth to 3.3%, enough to keep the market happy. Bolland announced “good progress with our plans to transform M&S into an international, multi-channel retailer”. A lot now depends on the retailer’s autumn/winter collection, which will be given a real promotional push in September. Will critical acclaim turn into strong seasonal sales? Future share price growth could hang on the answer.
Chew on that
I’ve been guilty of focusing on M&S’s clothing struggles while ignoring growth prospects elsewhere. Trading at a healthy 14.5 times earnings, the market has shown more appreciation of this stock’s virtues, leaving it only slightly cheaper the FTSE 100 average of 15.4 times earnings. Recent share price growth has pushed the yield down to just 3.6%, a fraction above the index average. Growth prospects look good, with M&S on a forecast earnings per share (EPS) growth of 6% to March 2014, and 11% in the subsequent 12 months. It looks like I’m the one who is a sandwich short.
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> Harvey doesn’t own shares in Marks & Spencer.
