Does Marks and Spencer Group plc Pass The Woolworths Test?

If you were listening to the Today programme on Radio 4 on Wednesday morning, you may have heard presenter Justin Webb ask a neat variant on what’s become known as ‘the Woolworths test’.
He was speaking to Marc Bolland, chief executive of beleaguered retailer Marks & Spencer (LSE: MKS), which at the time of writing has seen its shares climb 16% since announcing signs of a modest recovery in its fortunes.
And here’s what Justin Webb asked him: given Marks & Spencer’s perennial success with food and underwear, was there a case for ditching the rest of the store’s offerings, and just focusing on those two categories? In other words, should Marks & Spencer just sell food and undies?
Sensibly, Mr Bolland chose to ignore the question.

Tastes change

Nevertheless, despite its semi-jocular nature, it was a question that cut to the heart of the quandary that has faced Marks & Spencer over the past few years. And I speak as a long-suffering shareholder.
For it’s a quandary that takes us back to the Woolworths test, first posed back when former High Street retailer Woolworths was demerged out of Kingfisher and floated in August 2001.
Which is this: If Woolworths didn’t exist, would you invent it?
A question which was duly answered in December 2008, when the venerable business was finally thrown onto  the scrap heap, along with its eclectic mix of cheap (and mostly tacky) books, toys, games, children’s clothes, music CDs, garden equipment, pick-n-mix sweets and much else besides.

Former glories

Now, I’m the first to admit that Marks & Spencer has had its challenges in recent years. And that the cracks in the edifice first began appearing under the reign of Sir Richard Greenbury, almost twenty years ago.
Nevertheless, I continue to wish the company well. My late father had a long association with the business, and my own shareholding dates back to a purchase he originally made in 1992.
And for many years, Marks & Spencer did a lot of things right — including placing a value on social and ethical responsibility that extended into the employment conditions of its suppliers. Which is something that some other retailers could learn from, even today.
Moreover, let’s not forget that back in the Greenbury era, Marks & Spencer was the second most profitable retailer in the world, achieving over £1 billion in pre-tax profits in 1998, for example.

As with Woolworths, so with portfolios

So what does the Woolworths test tell us about Marks & Spencer now? There are, I think, two points to make.
The first is that Justin Webb’s jocular suggestion of a retailer selling only food and underwear is a non-starter.
Marks & Spencer needs to make its existing product mix work, and once again become a business that Britons shop at, as well as hold in some affection. And those Britons, needless to say, must encompass a broader age demographic than currently seems to be the case.
The second point is a more subtle one.
And it’s this: the Woolworths test has a relevance not just for individual shares, but whole portfolios.

Is the investment thesis still valid?

Share portfolios, let’s face it, evolve over time. Takeovers and acquisitions leave us holding shares in companies that we might not have bought, or leave us holding cash in place of shares we bought.
Some companies fare well, and see their share prices rise. Others fare poorly, and see their share prices fall. In both cases, the effect is to distort their overall worth within our portfolios.

Other companies simply fall out of fashion, or — in the long term — belong to sectors which fall out of fashion, or experience adversity. The dotcom duds of 2001 were followed a few years later by the finance failures of 2007-2008.
And so on, and so on.

Dead capital

So the portfolio version of the Woolworths test is this:
If I didn’t already own these shares within my portfolio, and in their current proportions, would I buy the same shares, in the same proportions, today?
Which is a question that doesn’t get asked as often as it should. Countless reasons — inertia, loss aversion, blind hope and outright folly — cause us to grimly cling on to shares, even though the original investment thesis is no longer valid.
They’re not doing any harm,” we tell ourselves, as we survey the duds clogging up our portfolio.
But they are. They most certainly are. Because those shares represent capital that could arguably be put to better use elsewhere, buying shares in businesses where the investment thesis is still valid.

So there’s no point being sentimental about it. If it’s a lack of capital that prevents you from grabbing some of the bargains that today’s market is throwing at us, take a long hard look at your portfolio, and ask:
‘If I didn’t already own it, would I buy it again today?’

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Malcolm owns shares in Marks & Spencer.