In the early days of my investing career, Marks & Spencer (LSE: MKS) was a big favourite among private investors.
But it all turned horribly wrong around 1997. The share price went into a tailspin from which it still hasn’t recovered. Even the past five years have seen a 35% fall in the Marks & Spencer share price, while the FTSE 100 has lost 7%. Still, at least M&S isn’t struggling as badly as Debenhams, and is far from the dire straits that led to the bust of House of Fraser.
But M&S does seem to be in a perpetual state of revamping its clothing offerings, trying to re-capture the imagination of each new generation of fashion-conscious buyers. And every time Christmas comes around, all eyes are captivated by that seasonal barometer of the high street.
And every year we’re disappointed. M&S frequently records good food sales, but year upon year it sees yet another season of fashion sales falling by the wayside. Will Christmas 2018 be any different?
Still changing
With the firm’s last full-year results released in May, chief executive Steve Rowe spoke of “the need for accelerated change,” and told us: “The first phase of our transformation plan, restoring the basics, is now well under way.” But at the time, I thought “Hang on, haven’t we been hearing this for years from M&S?“
And to me, it looks like M&S’s ability to cope with, never mind profit from, the increasing shift to online clothing sales is still some way behind the curve.
On the bright side, Marks & Spencer shares are actually up 15% since April’s low. So maybe some of our institutional investors are expecting something a bit better this year — although dead cats do sometimes bounce, of course.
Earnings fall
The City’s analysts are forecasting a fall in earnings per share of around 12% for the year ending March 2019, which isn’t great. But they have a pretty much flat year penciled in for the following 12 months, so maybe the outlook is turning for the better?
Perhaps, surprisingly, these weak forecasts still put the M&S share price on a P/E multiple of about 12, and that’s not far behind the FTSE 100’s long-term average of around 14.
To me, that suggests there’s still a loyal following for M&S among investors, and it’s struck me over the years how the shares manage to keep to reasonably healthy valuations when lesser-known retailers in the same business would be harshly punished. Debenhams, for example, though admittedly in a leakier boat, has its shares valued at a lowly P/E of 8.7.
Dividend sustainable?
The forecast dividend yield from M&S has been pushed as high as 6% by the price slump, so that will surely account for some of the shares’ resilient valuation. But my big doubt is whether that’s sustainable. Current forecast suggest cover by earnings of only around 1.3 times and falling. And unless we start seeing a return to decent earnings growth sometime soon, I can see that having to be cut, even though cash flow is decent.
This full year, including Christmas, could be crucial. And if we don’t see M&S’s “accelerated change” making a difference to the bottom line sometime soon, I can see further share price slumps ahead.
