Marks and Spencer (LSE: MKS) shares have been on the up after it adjusted its profits expectations for the full fiscal year to a pre-tax amount of £500 million. Naturally, investor excitement is on the high side at the moment given the turbulent history of this former FTSE 100 stock. But how much of it is hype and how much of it is grounded in good underlying conditions?
A Great British Business (no pun intended)
At 137 years old, Marks and Spencer is as much a part of the business woodwork as any other household name in Britain. This, of course, has its advantages but as current chairman Archie Norman once stated, Marks and Spencer doesn’t have a “divine right to exist.” The fact that it got booted out of the FTSE 100 is evidence of this. If the past 20 or so years are anything to go by, Marks and Spencer is not exactly the great business it used to be, but executives and investors are hoping that this has finally turned around.
Comparison to FTSE 100 giants
What we know is that M&S reported £269.4m in profit before tax in the first half of 2021, which is a radical turnaround from the £17.4m loss made in the same period last year. However, this is still quite far from the £541m and monstrous £1.14bn in profits before tax that Sainsbury’s and Tesco made respectively in the same period.
The “unvarnished truth”
Competition aside, the latest M&S earnings are certainly promising. However, Marks and Spencer lost its FTSE 100 status for very good reason. The combination of Steve Rowe (CEO since 2016) and Norman (chairman of the board since 2017) has yielded very little in the way of success for the company so far. From a management perspective, nothing has changed in the running of this business.
The underlying business itself has not changed either. The only reason why there was growth in the food sector more recently is that it purchased the retail arm of Ocado, which it paid £750 million for in 2019. This acquisition was long overdue compared to competitors, who entered the delivery game years ahead of Marks and Spencer.
Of particular concern in the long term is that it is continually waging a war on two fronts in two sectors that are extremely competitive – food and clothing retail. On the food side, it has to contend with major competitors like FTSE 100 giants Tesco and Sainsbury’s, and as a fashion retailer, with stalwarts like ASOS and Boohoo.
As a value investor, the fact the company has more than doubled the amount of debt on its balance sheet since 2018 to produce the returns that are only now being seen, is alarming to me. Overall, despite the promise of greater earnings, its limited resources and unimaginative leadership are spread too thin over two very competitive sectors and therefore it may continue to struggle in the long run.