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Why I’d forget Marks and Spencer’s shares following this recent news

Maybe you’ve been holding shares in the UK’s well-known retail chain Marks and Spencer Group (LSE: MKS) for its dividend yield and turnaround hopes. If so, the recent plunge in the share price will be disappointing and, to me, yesterday’s full-year results report is discouraging.

Then again, maybe you’ve been eyeing the shares for some time and see the recent fall as an opportunity to buy into the story at a better valuation. I wouldn’t, and here’s why…

Dire results

Roland Head covered the report yesterday, and one thing that sticks out in his article to me is when he said of the M&S food offering that “promotional activity has been reduced and prices have been cut on popular items, bringing them closer to mainstream supermarkets.”

To me, that speaks volumes about the firm’s decline. One of the big differentiators M&S traditionally enjoyed was that its food offering was regarded as something special by customers and therefore the company could charge a premium price for it.

For years, I reckon, many shareholders and potential investors had high hopes that growth in the Food division would overtake the decline in the Clothing and Home division. M&S itself seems to be clinging to that dream with one sub-heading in yesterday’s report reading “Protecting the magic and modernising the rest in Food.”

The trouble is, there isn’t any magic to protect any more in my opinion. Once, M&S provided food of a quality you just couldn’t get from mainstream supermarkets, but things have moved on. The supermarkets raised their games, and the quality available in the food they sold. Now, there’s precious little to differentiate one supplier from another. Tesco, Sainsbury, M&S, even Lidl and Aldi. You’d be hard pressed to tell the difference in a blind tasting of many products.

Decline and poor business economics

M&S today is a story of falling revenues, profits and cash flow and of store closures and declining dividends for shareholders. Trying to turn the old dinosaur around strikes me as a difficult and thankless task. M&S, once mighty, now seems to me like an anachronism set to go the way that many high street retail names have gone before – down and out.

One big hope for recovery is the recent 1-for-5 Rights Issue that raised just over £601m “to fund the joint venture with Ocado Group.” The idea is to create “the UK’s leading pure-play digital grocer.” But I’m sceptical. I don’t think grocery is a very attractive sector to get into, whether it’s done via supermarkets or online. Just look at the likes of Tesco, Sainsbury and Morrisons. Those firms have been struggling because of the fundamentally poor economics of the industry and the vulnerability of players in the sector to attacks from disrupting competition.

M&S is not the beast it used to be and probably never will be again. I’m avoiding the shares and hunting for investments in better companies.

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Kevin Godbold has no position in any company mentioned. The Motley Fool UK has recommended Tesco. 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.