Fool's Eye View

[ May 23, 2000 ]

M&S Dividend Cut

By Maynard Paton (TMFMayn)

Carburton Street, London -- Okay, I'll touch upon the dividend first. After much speculation by stock market pundits over the past week, Marks and Spencer (LSE: MKS), after announcing its annual results today, has slashed the dividend. This year's proposed full-year dividend is 9.0p, compared to last year's 14.4p payment.

With today's results leading to the first ever dividend cut in the history of M&S, a letter from recently-installed Chairman Luc Vandevelde should be landing on every shareholder's doormat very soon. Mr Vandevelde will ask his investors "to accept... the reality of our financial performance".

And so, onto to the reality of that financial performance:

                      53 weeks to  52 weeks to
                       01/04/2000   27/04/1999

Turnover (£m)            8,196          8,224
Operating Profit (£m)      543            601
Exceptional Items (£m)    (140)           (89)

Pre-tax Profit (£m)        418            546

Earnings per share (p)      9.0           13.0

Adjusted Earnings
per share (p)              13.2           15.6

Dividend per share (p)      9.0           14.4

This year's exceptional items mainly consist of redundancy costs and various write-offs concerned with the closure of Marks' Canadian operations. The company states that operating costs rose just 3% in the year, M&S investing an additional £39m in marketing, customer analysis and "visual merchandising". Also, an extra £13m was spent on advertising.

But what counts for investors in the retail sector is the top-line sales performance. If you've read the Motley Fool Industry Focus 2000, then you'll know that investment propositions in the general retail sector fall into two distinct categories. There is the rapidly expanding "growth" retailer and then there is the "recovery" retailer. Of course, M&S is now tailor-made for this second category.

And again, if you've read the Industry Focus 2000, you'll also know that both types of retailing investments rely heavily on impressive like-for-like sales growth performances. Positive noises in this area could indicate the start of the recovery at "Big Green".

A recovery?

So, is M&S turning things around on the High Street? Taking a quick look at the all-important like-for-like sales statistics over the year does give the impression of a few sprouting green shoots of recovery.

Sales Performance for the year to 01/04/2000
 (all figures in %)

         Q1   Q2    Q3    Q4  Overall Current

General -9.2 -10.4  -6.0  -2.4  -7.2    +3.8

Foods   -1.2  +0.4  +3.2  +1.8  +1.2    +4.7

Total   -6.1  -6.2  -2.8  -0.5  -4.0    +4.2

LFL    -10.3  -9.9  -5.6  -3.3  -7.2    +2.1

Certainly, M&S are keen to point out that the decline in sales within their UK retail division is reversing. The trend in "General" sales, consisting of clothes, footwear, gifts and furniture, does appear to be rising on a quarter on quarter basis, even moving into positive territory for the 8 weeks since the end of March. But the figures above need to be taken into context with those of last year.

Sales Performance for the year to 27/03/1999

                    Q1  Q2   Q3   Q4  Overall  

Like-for-like (%) +2.4 -2.1 -7.2 -7.4   -4.1    

Thus, although like-for-like sales in the third and fourth quarter in the year to 1st April 2000 are a slight improvement on the two quarters immediately before them, the comparable quarters of the year before were very poor. Comparing the two sets of figures for both years, the impression created is that of M&S stemming the deterioration in its trading performance, rather than making significant inroads to a sales recovery.

One bright spot hidden in the results was the current performance of Home Furnishings. Although having a rather lacklustre time in the financial year under review, reporting a pedestrian 1% gain in sales, the division has sparkled this Spring. Furniture sales in the last eight weeks are 35% up on the year before! But don't get too excited -- furniture contributes just 3% of group turnover.

Broadly neutral

Inevitably, there's lots of comment from M&S towards the future. The topics covered, revolving around the introduction of "profit centres", reviews of the St Michael brand, suppliers and logistics, a restoration of overseas profitability, building the financial services organisation and e-commerce, indicates the size of the task ahead. Mr Vandevelde describes M&S as having "embarked upon a profound transformation that will take time..."

But alongside all the predictions and optimism over the future, the reported results don't suggest any turnaround is on the near horizon. The real need for recovery is the main UK retail operation, equating to £6,482m, or 80%, of the group's £8,195m sales. Here, an overall decline of 1.8% year-on-year doesn't impress. Overall, I would describe these results as "broadly neutral".

Of course, those considering M&S have to weigh up the current share price's expectation of recovery against the figures and comment released today. At 244p, the shares having risen 23.25p (10%) this morning on the results, M&S stand on nearly 19 times today's adjusted earnings per share. That's a premium rating when compared to the rest of a similarly miserable retail sector. With a yield of under 4% too, there's still a lot of optimism in the M&S shares.

The combination that "recovery" retailer investors should be looking for is a substantial like-for-like sales growth performance coupled with a depressed price-to-earnings rating. I see neither at M&S. Reduced dividend or not, those invested in the High Street stalwart should expect a long haul journey to recovery. Those looking in the retail sector for High Street revival stories should look towards the numerous smaller, and more nimble, retail operators.

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Related Links

• Marks & Spencer discussion board
• Industry Focus 2000