Having recovered from an early drop, shares in FTSE 100 stalwart Mark and Spencer (LSE: MKS) were trading flat mid-morning as the company reported a mixed set of interim numbers to the market.
In the 26 weeks to the end of September, group revenue at the 133-year-old retailer rose 2.6% to £5.13bn compared to the same period in 2016. Broken down, like-for-like sales in its much-maligned Clothing and Home division hardly budged — a better than expected outcome. A 4.4% rise in revenue was also seen at its Food offering, even if gross margin fell due to increased cost inflation and the company’s decision to limit price increases to its shoppers.
With profit before tax and adjusted items falling 5.3% to £219m, however, a clear reversal in the bellwether’s fortunes is clearly going to take a long time. Indeed, while stating that the company had made “good progress in remedying the immediate and burning issues” outlined in 2016, CEO Steve Rowe also cautioned that M&S “still has many structural issues to tackle” in the midst of what is a “very challenging retail and consumer environment“.
So, are shares in M&S — now trading on a fairly cheap-looking valuation of 12 times forward earnings and offering a chunky 5.7% yield — a decent contrarian buy? I’m inclined to answer in the affirmative.
Sure, the company has its problems. Recent managerial departures (including today’s announcement that Chief Financial Officer, Helen Weir, will be stepping down) haven’t exactly inspired confidence. There’s also the more general problem of identifying who its next generation of shoppers will be, given the company’s dependence on baby boomers for profits rather than younger consumers. Recent performance has also been a lot worse than fellow FTSE 100 constituents Tesco, Sainsbury’s and Morrisons.
To M&S’s credit, it appears fully aware of the challenges it faces. Today’s report pulled no punches, stating that “increased global and digital competition, pressure on consumers’ disposable income and increased cost inflation” would “continue to erode” the company’s position in the market unless it learned to adapt. Personally, I find this kind of transparency encouraging. Moreover, recent developments suggest that it is getting a grip on its unenviable position — albeit at a pace to be expected from a £5.4bn retail juggernaut.
Aware of the need to reduce costs, M&S confirmed today that it had decluttered its head office and closed its defined benefit pension scheme. It also revealed that the next phase of its transformation would include slowing its Simply Food store opening plan in order to address the competition it now faces from convenience retailers. In addition to accelerating clothing store closures, M&S also announced its intention to become a “digital first organisation” by generating a third of its Clothing and Home sales online. Elsewhere, attempts made to reduce “unsustainable losses” from the company’s international operations already appear to having an impact with profits trebling to just over £60m over the reporting period. Factor in a 10% reduction in net debt and a 3.2% rise in free cashflow to £218m and few would accuse management of having its heads in the sand.
With the tricky festive season ahead, M&S’s next update in January should make for very interesting reading. Nevertheless, as part of a suitably diversified portfolio, I think the stock already warrants attention.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.