MARKET COMMENT
Marks Without Sparks

By Maynard Paton (TMFMayn)
November 5, 2002

There were few fireworks contained in this morning's interim results from Marks & Spencer (LSE: MKS). Although the retailer reported headline pre-tax profits jumping 30% to £287m, cautious comments on forthcoming trade should make shareholders wary.

Progress at M&S' domestic retail operation caused the profit leap. Although sales edged from £2.9b to £3.1b, operating profits surged 60% to £236m. The new per una, Autograph and Blue Harbour clothing ranges, alongside an improved supply chain, helped margins jump from 5% to 7.5%. With the help of the capital restructure performed earlier in the year, earnings per share rose 60%. The half-year dividend increased 8% to 4.0p.

The logistical turnaround at Marks now looks complete. Being "focused on gaining market share" certainly suggests there's limited scope for further margin and operational improvements. Furthermore, today's statement contained two ominous statements. Marks admitted that its market share targets are to be achieved "in a market we expect to become less buoyant". There was also a reminder that the company was "coming up against challenging year-on-year comparisons", too. Throw in a vague comment about Christmas trade and a potential £60m charge relating to a new credit/loyalty card for next year, and you have plenty of scope for a disappointing performance ahead.

At 362.5p, M&S shares presently trade on a forward price to earnings ratio of 17 and offer a prospective yield of 2.8%. Hardly great value. After more than doubling over the past two years, there are definite signs the shares are falling back down to earth.