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Can Marks and Spencer Group Plc Go Head-to-Head With NEXT plc & ASOS plc?

It seems barely yesterday that Marks and Spencer (LSE: MKS) could do no good in the eyes of investors — and to be fair, it was struggling to get its clothing sales out of the slump they’d been in for years. But full-year results on 20 May following on from encouraging interim figures in November have sent the shares to 52-week record levels, with the current 593p price representing a 34% gain in 12 months.

The year to March brought in a 6.1% rise in underlying pre-tax profit, although General Merchandise, which includes clothing, didn’t quite meet expectations. Still, it did see like-for-like growth in Q4, and M&S.com is also back to growth. And M&S’s fashion sense has been catching the eye of the press in recent days, after an apparently well-known pretty young thing was spotted sporting one of its garments.

Which is best?

But to capture the attention of the trend-followers, M&S is going to have to drag some of them back from the likes of NEXT (LSE: NXT) and ASOS (LSE: ASC), both of which are streets ahead in online retailing.

Online shopping is, of course, all that ASOS does, and its fortunes have been very mixed over the years. With its shares at 3,560p you’ll have made a fortune if you got in in the early days. Yet the price reached more than £70 in early 2014, and those buying at the peak will surely be ruing their bullishness.

April’s interims showed a 14% rise in revenue for ASOS, but a corresponding boost to gross profit of only 9% with margins being squeezed by competition and by currency exchange. And at the bottom line, diluted EPS actually fell by 5%. ASOS is on a forward P/E of 86 now, and it would need a six-fold climb in earnings to get that down near the FTSE’s long-term average of 14. I don’t know about you, but I don’t see that happening in the next five years.

High-street rivalry

No, the real high-street competition that M&S is up against is surely NEXT, whose shares are up 14% over the past year to 7,460p. And we’re still only looking at P/E forecasts of 17 for January 2016 and 16 the year after. That’s very close to M&S’s rating, yet NEXT’s growth outlook for clothing is significantly brighter — in that critical online sector.

In fact, NEXT Directory sales in the quarter just ended rose by 9.2%. For the full-year the firm is predicting between 0.4% and 6.7% pre-tax profit growth, and with NEXT traditionally being conservative I’d expect something in the upper half of that range. We should also see a special 3.3% dividend to add to an ordinary dividend of 2.1%, adding to the attraction.

Buy M&S?

So is M&S really back? I’ll want to see more quarters of General Merchandise sales recovery before I decide, along with sustained growth in online trading.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.