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The Marks and Spencer share price has fallen by 50%. Is it time to start buying?

The Marks and Spencer Group (LSE: MKS) share price has now fallen by 50% since May 2015. One reason for this decline is the heavy selling of shares by hedge funds who have gone ‘short’ on the stock — they are betting it will keep falling.

According to the latest regulatory reports, around 12% of the group’s stock has now been sold short.

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Does this mean that M&S is heading down the same troubled route as high street rivals House of Fraser and Debenhams? Not necessarily. Today’s half-year figures revealed the group’s pre-tax profit rose by 7.1% to £126.7m during the six months to 29 September.

This increase in profit was paired with an unchanged interim dividend of 6.8p per share. This suggests to me that the full-year payout of 18.7p is likely to be maintained, giving a useful 6.4% dividend yield.

So everything’s rosy?

Not so fast. Group sales fell by 3.1% to £4,997m during the period and although some of this was due to store closures, like-for-like sales were down by 1.1% in Clothing & Home and by 2.9% in Food.

Chief executive Steve Rowe said that the group has “accelerated the pace of change” but admitted that he’s having to “rebuild the foundations of the future M&S”. This process is still in its early stages.

So far, the company has closed 29 stores from a planned total of 100. This first group of store closures cost £47.6m and I suspect that troublesome long leases may mean that later closures are even more expensive.

The retailer is also still playing catch-up online, but said that 20% of Clothing & Home sales are now made through the group’s website, up from 16.5% last year.

Finally, changes are also taking place to simplify the group’s supply chain and reduce the amount of cash tied up in stock.

Why I’m tempted

A lot of risk still lies ahead for M&S. Chairman Archie Norman and Mr Rowe are trying to deal with the consequences of a changing retail market and decades of neglect.

However, this business still appears to have a number of qualities that place it ahead of some big high street rivals. An underlying operating profit margin of 5.3% isn’t bad at this stage. Although lower than in some previous years, I’d expect this figure to rise if M&S can develop its online business.

The other big attraction for me is that this big retailer still generates a lot of free cash flow. Today’s half-year figures show free cash flow of £241.2m after the one-off costs associated with store closures and restructuring.

This cash inflow helped to reduce net debt by 12% to £1,781m during the first half. It also provides cover for the dividend.

Mr Rowe confirmed today that profit guidance for the full year remains unchanged. This puts the stock on a forward price/earnings ratio of 11.1, with a prospective yield of 6.4%. If you believe that this business can be reshaped for the future, then I think the shares look cheap at this level.

I’ve added Marks and Spencer to my watch list and rate the stock as a potential turnaround buy.

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Roland Head 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.

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