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Why I Love Marks and Spencer Group plc

There is a thin line between love and hate. But today, let’s hear it for hate. Here are five reasons why I really don’t like about Marks & Spencer Group (LSE: MKS) (NASDAQOTH: MAKSY.US).

Its clothing range sucks.

Now I’m middle-aged, I don’t care too much about fashion. But when I was a young fella about town, I wouldn’t have been seen dead in M&S casual wear. And I’m far from alone. M&S continues to notch up more fashion misses than hits. Its recent results showed yet another fall in merchandise sales, which includes clothing, of 1.3% in the second quarter, following a 1.6% Q1 drop. Now that just isn’t cool.

I expect the fashion disaster to continue.

Merchandise sales have now fallen for nine consecutive quarters, and in a market that is so competitive, I can’t see how M&S can turn that round. It is squeezed between the high fashion brands at one end and cheap and cheerful Primark at the other, and has still to forge a clear and modern identity for itself. Its new women’s autumn/winter collection has had a frosty reception. Management has tried every possible trick to turn things round, I can’t see what else it can have up its sleeve.

I don’t know what it is.

Is it a clothing chain, is it a food retailer? The balance is tilting firmly towards food, which now accounts for 55% of revenues. Sales rose 3.2% in the second quarter, on top of a 2.7% rise in Q1. That’s the main reason the share price is up 30% in a year, double the average growth on the FTSE 100. But investors are buying a two-speed operation: a tasty food retailer, chained to a fashion failure. For each step forward, M&S is forced to take one step back. Another concern is that it doesn’t make the most of its prime strength, because it lacks an online food channel.

Its customers are hurting.

M&S is often said to be Middle England’s favourite store, but Middle England is hurting, as wage growth consistently fails to keep up with inflation. The general malaise on the high street could make life even harder for M&S, which is the cornerstone of many a high street. As surrounding stores get boarded up, M&S could also see its footfall drop. At the same time, its operating costs are rising, up 4.1% on a year ago. Marks & Spencer also belongs to the squeezed middle.

It keeps proving me wrong.

Two years ago, I gave M&S a bit of a kicking on these pages. Since then, its share price has risen 53%, proving me wrong. But that leaves it trading at a fully-valued 15.3 times earnings and yielding a so-so 3.4%, neither of which tempt me. With forecast earnings per share growth expected to rebound to 3% next year and hit 13% in 2015, there is a chance that I may be wrong again. And I would really, really hate that.

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Harvey Jones doesn't own shares in any company mentioned in this article.