MARKET COMMENT
Time To Switch From M&S

By Maynard Paton (TMFMayn)
April 8, 2003

The revival is over at Marks & Spencer (LSE: MKS). This morning's update from the venerable retailer revealed a sharp slowdown in sales growth and cautious comments on future trading. Rather than plod on with M&S, shareholders should now switch into alternative recovery plays.

Exacerbated by a late Easter, M&S had a miserable fourth quarter. Total turnover improved just 2.4% in the three months ending March, while like-for-like sales inched just 1.0% ahead. Worryingly, total clothing revenues fell 0.3%. It's all a far cry from this time last year, when a near 11% like-for-like sales improvement was reported for the final quarter.

Still, M&S confirmed year to March 2003 profits would be at the top end of expectations, which indicates a £700m pre-tax result. Worth remembering also that Luc Vandevelde, chairman and architect of the M&S turnaround, now works at the retailer on a part-time basis; an indication that the hard recovery work has been completed?

Down 9.25p to 286p in early trade, M&S shares no longer offer much tangible value. A price to earnings (P/E) multiple of 13.5 and a dividend yield of 3.6% looks quite reasonable in what is a notoriously competitive and fickle sector. So, for those M&S investors with a taste for company resurrections, Matalan (LSE: MTN), the discount clothing chain, and J Sainsbury (LSE: SBRY) could now be suitable replacements.

Matalan, at 159p per share, sports a P/E of under 8 and yields over 5%. The supermarket, at 234p, sits on a P/E of 10 and yields nearly 7%. Both Matalan and Sainsbury have suffered of late, but a turnaround in fortunes ought to see a favourable re-rating. Both are seen as high street basketcases at present, but so was M&S before its revival.

More: No Bargains At M&S | M&S Is No Bargain | End Of The Line For M&S's Recovery