Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.
In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety and valuation. How does M&S (LSE: MKS) measure up?
1. Prospects
Food comprises just over half of M&S’s sales, with general merchandise and fashion the remainder. M&S competes with the supermarkets, general merchandisers like John Lewis, Next and Debenhams, and fashion chains like Zara — no wonder the broad-range retailer has been struggling.
While food is progressing well, general merchandise and especially womenswear has suffered from M&S’s dowdy middle-class image and poor logistics. Market share of womenswear has declined from 16% in 1997 to 11% today.
Online sales are growing faster than the market, but 766 UK high-street stores are possibly now a millstone.
Internationally with 418 stores in 51 countries, M&S is doing well in India, China and the Middle East by exploiting the ‘Britishness’ of the brand, but legacy European stores are struggling.
2. Performance
Overall turnover has seen consistent growth thanks to the success of its food offering, but M&S has just seen its eighth quarterly like-for-like decline in general merchandise, seen as essential to its turnaround.
Margins have shrunk as grocery has lower margins than general merchandise. A new centralised distribution warehouse and 10% reduction in the number of suppliers is hoped to boost margins.
3. Management
CEO since 2010, Marc Boland previously turned around then-ailing supermarket chain Morrisons. However, M&S’s askew development of food versus general merchandise is taking the shine off his reputation. Many pundits believe his job depends on the success of this autumn’s fashion range.
Having six executive directors on the board doesn’t help M&S’s reputation for management in-fighting.
4. Safety
Net gearing of 84% is safe if on the high side, with interest is covered over five times. There is little comfort in asset backing.
M&S has a sizeable property portfolio but has placed assets in a partnership with its pension fund. That’s created a net pension asset and reduced the risk of the £6.7bn gross liability (90% of M&S’s market cap), but at the cost of readily-realisable upside.
The business throws off cash, turning £0.7bn of operating profit into £1.3bn of cash flow, but recently heavy capex means dividends aren’t covered by free cash flow.
5. Valuation
A forward P/E of 14.2 is in line with general retailers and more than the supermarkets. M&S’s shares are occasionally buoyed by speculation of a private equity takeover. The prospective dividend yield is 3.7% but it’s not the safest of dividends.
Conclusion
M&S’s autumn range has been well-received by the fashion press and success with sales would see the rehabilitation of management and progress in earnings and share price. But there’s substantial downside risk and some question whether M&S’s business model still works.
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> Tony does not own any shares mentioned in this article.
