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Three Reasons To Sell Marks and Spencer Group Plc Today

Last year’s declining clothing sales at Marks & Spencer Group (LSE: MKS) (NASDAQOTH: MAKSY.US) led to the firm’s decision rejuvenate its ‘general merchandise’ division with a new management team led by ex-Debenhams chief Belinda Earl.

Long lead times mean that the autumn/winter collection that is currently in the shops is the first chance the British public has had to see the work of Ms Earl, and expectations are high; will M&S manage to restart growth in its core business of clothing sales?

Valuation is ahead of results

I’m probably not the best person to judge whether the new ranges now appearing in my local M&S will be successful, but luckily, as a Foolish investor, I have a more reliable source of information — the company’s financials.

Here, the message is unmistakeable: any realistic turnaround is already priced into M&S’s stock price.

Over the last year, Marks & Spencer’s share price has risen by 29%, beating the FTSE 100’s 11% rise. Anyone who purchased M&S shares when they really did look cheap, at the start of 2012, will now be sitting on a gain of more than 50%, which has left the firm’s shares trading on a trailing P/E of 16.6, thanks to falling earnings.

Unappealing financials

Marks & Spencer’s operating profit has fallen by 10% since 2011, and its dividend has been unchanged for the last two years. The firm’s rising share price means its previously attractive yield has now fallen to 3.5%, which is only slightly above the FTSE average of 3.1%.

I’m also not keen on Marks & Spencer’s rising net debt, which is now in excess of £2bn, giving the firm net gearing of 83%. The cost of servicing this debt is rising, and M&S spent £218m on finance costs last year, which accounted for nearly 30% of its operating profit.

Unrealistic expectations?

If Marks & Spencer scores a hit with its new ranges this autumn and they mark the start of a turnaround in the firm’s clothing sales, any resulting growth will be slow and steady, not rapid.

Marks & Spencer’s current valuation and recent financials suggest to me that any such growth is already priced into the shares. However, if sales disappoint, and the firm’s cash flow continues to be squeezed by debt, store upgrades and dividend payments, then I think that the shares could fall back to the levels seen earlier this year.

An alternative to M&S

If you’ve already taken the plunge and sold your Marks & Spencer stock, you may be looking for high-quality blue chip companies that currently look cheap.

Buying such companies has worked well for top UK fund manager Neil Woodford. If you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!

If you’d like access to an exclusive Fool report about Neil Woodford’s eight largest holdings, then I recommend you click here to download this free report, while it’s still available.

> Roland does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Debenhams.