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Why Marks and Spencer Group Plc Will Be One Of 2013’s Winners

Marks & Spencer (LSE: MKS) (NASDAQOTH: MAKSY.US) has been in a transformational phase for the past few years, with the familiar high street chain somewhat losing its way on the fashion front.

Profits have been erratic too, with no real improvement over the past three years — earnings per share (EPS) for the year to March 2013 still failed to reach 2010’s figure.

It’s up how much?

It might surprise some, then, to learn that Marks & Spencer shares have beaten the FTSE hands down over the past five years, putting on 130% to reach today’s 514p while the FTSE 100 has barely gained 60%!

And since the start of January this year, M&S is up 34% against the FTSE’s 15%.

M&S has been paying out more dividend cash too — between 4% and 5% — while the FTSE has been managing only around 3%.

With earnings stagnating, the share price rise has sent the P/E ratio up, and from under 10 in 2011 the shares are now on a forward P/E, based on forecasts for the year to March 2014, of 15. That’s higher than the FTSE average of 14.

Forecasts up

But analysts are finally expecting a return to growth — there’s an EPS rise of only 3% predicted for the current year, but for 2015 they’re suggesting 13%.

And after being stuck at 17p per share for three years, the dividend should start moving again — up to 17.5p for 2014 and 19p for 2015 if the City has it right. The yield will be down, to 3.5% and 3.8% respectively, but that’s what happens when the share price climbs.

But what about this year specifically? M&S released first-half results on 5 November.

For the six months to 28 September we saw total sales up 3.6% from the first half last year, with the second quarter bringing in a 3.8% rise on last year’s Q2. And while shoppers in the UK might have a mixed view of M&S as a brand, it’s well-regarded overseas — international sales gained 7.4% in the quarter and 8% over the half.

Fashion is key

The only disappointing sales figure was from General Merchandise, which covers clothing — overall it was up 0.4%, but that translated to a 1.5% fall on a like-for-like basis.

However, chief executive Marc Bolland said “Our key priority was the re-launch of Womenswear“, and the firm’s “first new collection with new advertising and improved store formats” was only launched in September. So it hasn’t had much chance to affect reported sales yet, but Mr Bolland did say that it has been well received.

First-half pre-tax profit did fall a little, from £287.3m to £261.6m, with underlying EPS down from 14.1p to 13.5p. But that was largely in line with expectations, and the interim dividend was held at 6.2p per share.

All in all, that looked like a pretty decent set of results to me, especially as the retail sector is still suffering, with consumer confidence only gradually improving.

The Christmas period will be a good test, but I’m confident that Marks & Spencer will be one of 2013’s winners — and 2013/14 could turn out to be its key turnaround year.

And finally...

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> Alan does not own any shares mentioned in this article.