Is it a department store? A fashion retailer? A food seller? That’s the identity question that Marks & Spencer (LSE: MKS) has been struggling with for years. Thursday’s results hopefully brought the answer a little closer. And on the whole, the markets liked it, as the M&S share price ended the day up 8.5%, after breaking 10% in earlier trading. It’s still down 37% over the past two years, mind.
We heard of falling revenue, a statutory pre-tax loss of £209m, and more stores set to close. Still, on the upside, at least for those wanting M&S to focus on its food offerings and its Ocado tie-up, more stores are set to close. Clothing and home revenues dipped by 31.5% overall, even though online sales gained 53.9%.
The optimism is all about food and Ocado. Like-for-like food revenue was up 1.3%. And after excluding hospitality and franchise operations, M&S recorded a like-for-like gain of 6.9%. Possibly key to the market optimism, M&S products made up more than 25% of Ocado’s average basket. But is it wise for investors to tie the M&S share price to the Ocado share price? I’ll come back to that in a moment.
More store closures
Marks & Spencer has been downsizing its chain of stores and cutting jobs for years. And the company now intends to close 30 more stores over the next 10 years. But M&S also plans some openings and expansions over the next couple of years. So it’s going to be gradual, and not all one-way losses. I suspect it’s too early to guess how those plans will pan out in the coming years anyway, just coming out of the pandemic lockdown.
Until we get back to high street business as usual, I won’t have a clue about the true long-term prospects for M&S stores. Or be able to guess at where the M&S share price might go. Having some idea of a rational share price valuation is important to me. That’s because I’ve been watching the Marks & Spencer transformation for years, and I keep thinking it might finally be time for me to buy.
M&S share price valuation
So what about Ocado? Here’s my concern. The Ocado share price has fallen over the past few months. But the company still has a market cap of around £14.5bn. That’s more than six times Ocado’s 2020 revenue. And it’s not making a profit. Now, Ocado is very hard to value, as investors see it as a technology company rather than just an online retailer, with its online retailing systems being the big attraction. I think that’s fair. But I worry what effect we might see on the M&S share price should Ocado suffer any future tech stock stumbles.
While Ocado clearly appeals to growth investors, M&S has traditionally appealed to boring old income and value investors like me. And while the two companies might be good fits in their retail venture, I just get twitchy about seeing the increasing dependency of one on the other. From an investing perspective, that is.
So while I can’t see a clear way to value either the M&S share price or the Ocado share price, it’s still not time for me to buy.
