Unfortunately it's 33% off the dividend. M&S is battling hard, but sales and profits are still falling.
It wasn't quite 'Everything Must Go' when Marks and Spencer (LSE: MKS) produced its annual results this morning, but for its legions of small shareholders it might has well have been, with the retailer lopping back the dividend. As I write, M&S shares are down 7% to 315p.
Cutting the dividend a week after another private investor favourite, BT, did the same deed, M&S Executive Chairman Sir Stuart Rose can't expect adulation from shareholders who spot him lurking in the underwear section of their local store. But angry letters from 'Disgusted of Tunbridge Wells' now are better than future City wrath should holding the dividend threaten the company's financial position.
This year's basic earnings of 28p per share barely covered the old dividend, which is now 'rebased' to 15p a share -- a cut of 33%. With earnings forecast to fall further, Sir Stuart swallowed his pride.
Down, down, down
Having helped spark a party atmosphere for retail stocks in March with a less gloomy than expected update, these results are less inspiring.Overall sales were 0.4% up, mainly due to its growing international sales, but everything else was down.
- Down: UK like-for-like sales -5.9%
- Down: General Merchandise -6.9%
- Down: Food -5.0%
- Down: Pre-tax profits at £706 million, from £1.1 billion last year
- Down: 28p earnings per share, from 43.6p last year
- Down: 9.5p final dividend
"Trading for the first seven weeks of the year has been broadly in line with trends experienced in the fourth quarter" said Sir Stuart Rose, but he warned, "we remain cautious about the outlook for the remainder of the year."
M&S expects margins to fall further -- recession-battling promotional offers don't come cheap. The company has already announced job cuts and the closure of two dozen Simply Food stores, and capital expenditure has also been curtailed.
One superficially welcome falling number concerns M&S' massive debt pile, which fancy footwork has massaged down to £2.5 billion. But only a fraction of the £600 million decrease will have come from cash flow.
Mid-market still the future for M&S
City pundits who wouldn't be seen dead in an M&S suit often talk down the company's relevance, comparing it to that High Street dinosaur turned dodo, Woolworths.
But M&S is very different. Its food range is bang up-to-date, and the company is offering shoppers tempting discounts -- I know many who've flocked to its £10 Dine in offers. Discounting has hit margins but it's helped arrest its decline in market share, and when the recession ends the customers will be there to rebuild profits.
As for clothing, M&S remains the UK's leading retailer, with a market share of 10.7% by value, and 11.2% by volume. Jermyn Street tailored analysts might not like it, but their mums still buy their Christmas socks from M&S.
It's true M&S Womenswear has yet to enjoy a Primark-style moment despite several years of innovation, but with the funkier fashion now being integrated throughout the range, M&S has moved some way from its turn of the century image.
Are the shares good value?
The reality is this recession will (probably) end within the next year. Unemployment will keep rising for a while, but at some point shoppers will return and recommence spending slightly too much at shops that make them feel good about themselves.
The task for M&S is to be in good shape when the recovery begins. Panicking and turning its prime retail sites into inefficient versions of Aldi, Lidl or even Tesco (LSE: TSCO) would be suicidal. As such, management's current strategy looks sensible.
M&S' fortunes seem to rise and fall with the economic cycle -- it first made £1 billion in profits more than a decade ago -- and while boosting online sales or its financial services will help at the margin, £1 billion (ignoring inflation) looks a reasonable ceiling for UK profits.
Like Tesco, M&S highlights international sales as one way to bolt on growth. Such revenues rose 29.5%, and 33 new stores were opened overseas, including the first M&S in China. But shareholders with longer memories will remember M&S' humiliating retreat from France. More evidence is required before we can conclude its newer overseas ventures will thrive.
As things stand, M&S seems to be a cyclical company with a secure position in its sector, arguably maintained with too much debt. With Armageddon having abated, the 50% appreciation in its price from 200p last October seems warranted, but with analysts forecasting a further drop in annual earnings per share to 22p, M&S is on a forward P/E of around 14.5. That's steep.
What about when the economy recovers? Earnings per share over the past five years average out at 32p a year. On that measure, a P/E of around 10 at today's 315p looks about right. To justify a higher rating, I'd want to see successful overseas expansion ahead of the 15-20% of revenues targeted by 2012.
For new income investors, the rebased dividend of 15p represents a fairly secure looking yield of around 5%. Sadly, existing shareholders may have to make up the shortfall by doing their weekly shop at a discount store.
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