Shares of Marks & Spencer (LSE: MKS) jumped over 5% in early trading this morning after the company released a Q4 update with performance ahead of market expectations.
The iconic high-street retailer reported total sales up 1.9%, comprising: Food (+3.7%), General Merchandise (+1.3%), M&S.com (+13.8%) — and only International sales showing a decline (-3.8% at constant currency; -6.3% at actual exchange rates). The international performance was largely out of the company’s hands: in addition to the impact of a weakening Euro, macro issues hurt franchise partnerships in Russia, Ukraine and Turkey.
The really big positive in the results was the performance of general merchandise, where positive sales, including a 0.7% rise in like-for-likes, ended 14 consecutive quarters of declines. In particular, M&S seems to have got its fashion offer right back on track, which means clothing, footwear and homewares are no longer a drag on the company’s continuing strong performance in food.
It happens that just as M&S has got both its major divisions firing, J Sainsbury (LSE: SBRY), which had previously been in that position, has now seen its food sales stall and go into reverse.
Is it now time to invest in M&S — and even to sell Sainsbury’s in order to do so?
Let’s have a look at some numbers. The table below shows earnings growth for the two companies over the last four years, and analyst estimates (e) for the next three.
|
2011 |
2012 |
2013 |
2014 |
2015 (e) |
2016 (e) |
2017 (e) |
|
|
M&S |
+5% |
0% |
-9% |
+1% |
+1% |
+8% |
+8% |
|
Sainsbury’s |
+11% |
+6% |
+10% |
+6% |
-23% |
-14% |
+3% |
M&S’s positive update today seems to confirm analyst forecasts that the company is on the cusp of a shift to strong earnings momentum, while Sainsbury is expected to go the other way.
How about valuation? Well, current-year estimates (ahead of today’s update) put M&S on a P/E of 17.2, falling to 16 for next year and 14.8 for 2017. The multiples for Sainsbury’s are 10.2, 11.8 and 11.5. I would imagine we’ll see some earnings upgrades for M&S, lowering its P/Es — although I’m sure they’ll remain higher than those of Sainsbury’s as the two companies’ share prices currently stand (560p and 260p, respectively).
What about dividends? Well, it’s a similar story to earnings, with M&S having the momentum and Sainsbury’s having a stalling, but higher, yield. For the current year, forecasts put M&S on a yield of 3.2%, rising to 3.3% next year and 3.6% for 2017. The yields for Sainsbury’s are 4.9%, 4.2% and 4.3%. Again, we could see some upgrades to M&S’s dividend forecasts — but again, I’m sure the yields will remain lower than those of Sainsbury’s at current share prices.
It’s easy to underestimate the importance of momentum in retailing, and I think that on a 3-5 year view M&S could deliver a better return for investors than Sainsbury’s, despite the latter having “cheaper” earnings and dividend ratings. I’m not sure, though, that M&S’s prospects are so good and Sainsbury’s so poor that if I already held the latter’s shares I would rushing to sell them to buy into M&S.
