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Which will win in 2019, the Next or Marks and Spencer share price?

Boxing Day sales news from the physical retail sphere didn’t look good, with early data suggesting footfall on the day fell for the third year running. There was one sign of optimism, though, in that London’s West End enjoyed a visitor traffic increase of 15% — and perhaps where London leads, the rest of the county might follow? Or maybe not, given the influx of tourists boosting the London figures.

When I look round city centre shops, business seems to be dominated by clothing — fashion, sports, shoes, etc. And I can’t help seeing two FTSE 100 companies as barometers of the general retail scene.

One is Marks & Spencer (LSE: MKS), which perpetually seems to be representative of the struggling end of the market. Every year for as long as I can remember, M&S has seen food sales doing fine, but clothing sales always seem to be just one marketing revamp away from finally getting going again.

At the other end there’s Next (LSE: NXT) which, in my view, has some of the best retail management and buyers in the business. Every year, despite slowdowns and struggles, Next just seems to nail it.

Market reaction

When the markets reopened on Thursday after the Christmas break, M&S shares dropped a little, losing 1.6%. But that looks like more of a result of the general market decline on the day, and M&S finished the day along with the FTSE 100 which lost 1.5%. Investors, then, are apparently not seeing this year’s weaker Boxing Day sales as a reason to dump retail shares yet.

The Marks & Spencer share price has fallen by 23% so far in 2018 (with just another couple of days to go), reaching its lowest level for nearly 10 years. During that time, earnings have been struggling. And, coming off the back of earnings declines in the past two years, forecasts suggest a further 13% fall for the year ending March 2019. 

But there is surely a price that makes M&S shares cheap, regardless of how poorly the firm might be performing in relation to its competitors. After all, it is still making profits, and the share price slump has pushed forecast dividend yields up as high as 7.5%.

One problem for me is that dividends are only covered around 1.3 times by earnings, and I can’t help seeing them coming under pressure — especially as the company was shouldering net debt of £1.78bn at the interim stage this year.

Better value?

By contrast, the 4% ordinary dividends predicted for Next would be covered more than 2.5 times by forecast earnings, and they look safer to me. And, despite tough retail conditions, Next’s forecasts suggest modest single-digit percentage rises in earnings per share — it just hasn’t suffered the same slump.

Next shares ended Thursday ahead of the Footsie, up 0.1% compared to the index’s 1.5% fall. That suggests relatively robust confidence in the firm, even after the Boxing Day slowdown.

Having said all that, the shares are 11% down since the beginning of 2018. But I really can’t help feeling they’re close to the floor now and that all the pessimism (and then some) is already reflected in the price. The shares are on a forward P/E of approximately 9.5, even lower than Marks & Spencer. I reckon Next is the better bargain.

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Alan Oscroft 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.