The relatively new management team at Marks and Spencer (LSE: MKS) has ditched issuing quarterly results, asking investors to focus instead on the long term. This is admirable and something the world’s best-known investor Warren Buffett agrees with. The trouble is, in M&S’s case, looking at the long term — at least in the rear-view mirror — makes for a thoroughly dismal picture.
The FTSE 100 firm’s shares are currently trading at a bit above 300p, a level first reached as long ago as 1992. Sure, there have been dividends along the way (and cuts) but factor in a quarter of a century of inflation and I calculate the real return over the period as somewhere around zero.
There have been spells when it looked like M&S’s business might thrive once again and the shares rose accordingly (comfortably above 700p at one peak in 2007), only to fall back when recovery fizzled out. The big question today — certainly for investors taking a long-term view — is: Can the company’s latest management team deliver sustainable growth in the business and shareholder returns? Or is M&S simply too structurally challenged?
Rebuilding foundations
Company veteran Steve Rowe took up the chief executive role in April 2016. He has the benefit of fresh perspectives from outside appointments in the shape of chairman Archie Norman (joined September 2017) and finance director Humphrey Singer (joined July 2018).
M&S’s half-year results this week only served to emphasise the scale of the transformation task ahead. The company said that in “rebuilding the foundations of the future M&S” it had already reorganised “in the biggest change to our structure for decades” and that “every aspect of our ranges, how we trade, our supply chain and marketing is undergoing scrutiny and change.”
Smarter than predecessors?
In attempting to get M&S on a path to sustainable growth, previous chief executive Marc Bolland racked up almost £3.8bn of capital expenditure over six years, an average of £626m a year. In Steve Rowe’s first two-and-a-half years, average annualised expenditure has been just £296m. Given that current management has implicitly accused past management of under-investment in a number of areas, presumably it believes it can invest a lot less but a lot smarter than its predecessors. That’s one of a number of things I think could prove to be over-optimistic.
Another of the risks I see is that M&S’s store closure programme could need to be more extensive (and expensive) than is currently envisaged. With a swathe of its ageing customer base departing each year for the Great Clothing Emporium and Food Hall in the sky, the company badly needs to get younger generations into its stores and clicking on its website. On the latter front, clothing and home online sales running in the 6% region compares unfavourably with online growth at clothing and home retailer Next (17%) and even the disaster that is Debenhams (16%).
Unconvinced
It’s possible M&S’s shares could rise from their current level on any signs of progress in the turnaround of the business. However, after past disappointments, I don’t think we’ll see 700p again in a hurry. Indeed, I’m not convinced M&S can ever deliver long-term sustainable growth. And as I also see significant downside risk, due to the factors I’ve discussed, it’s a stock I’m avoiding.
