The retailer’s share price is down 25% since the turn of January thanks to its broad palette of trading problems. But here I’m explaining why it’s a folly to expect its tie-up with Ocado in particular to rescue its sinking top line.
From September 2020, consumers will be able to buy Marks & Spencer goods via the latter’s delivery network, but over-saturation in the market threatens to capsize hopes of a recovery. As well as taking on the might of e-commerce heavyweights like Tesco and Sainsbury’s, M&S also has to take on a mighty new entrant in the form of US online giant Amazon and its AmazonFresh service.
Some would argue that this Footsie firm’s prominent role in the upmarket food segment will help it to thrive, though I’m not convinced by this line of argument. This part of the market is no longer the earnings-protective niche that it once was, with all of the country’s major chains supercharging investment in their premium lines in recent years. Besides, it’s a stretch to expect sales of expensive edibles not to slip heavily as the UK economy gets ever-weaker and consumer spending power subsequently dives.
And Marks & Spencer’s biggest direct rival, Waitrose, is also ramping up its e-commerce proposition as its own relationship with Ocado ends. Under its new deal with Today Development Partners, it plans to treble the size of its online business to make it a £1bn operation within the next three years, achieved through a mix of bolstered capacity and automation improvements.
One further thing: an HSBC poll conducted in the spring suggested that almost a quarter of Ocado customers would stop using the business once they stop selling Waitrose goods, the vast proportion of which consider M&S goods to be an underwhelming substitute. It’s hardly a good omen ahead of the service’s launch next autumn, right?
6%+ yields? No thanks!
It might be a stretch to call Marks & Spencer a dividend share given its decision to rebase the payout in the wake of the £750m Ocado tie-up. It slashed the annual payout more than 25% for fiscal 2019 and it expected to reduce it again to 11.4p per share in the current period. That projection still yields a mighty 6.1% though, a reading so high that many income chasers might be tempted to leap in.
My view is that share pickers need to give the retail giant a wide berth today, however. Grocery is not Marks & Spencer’s only problems, of course, the recent firing of fashion chief Jill McDonald after just two years illustrating the struggles at its critical clothing division as well.
So forget that big yield, I say, as well as its rock-bottom forward P/E ratio of 9.4 times. I think M&S is a bona fide investment trap that’s likely to keep costing investors a fortune.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. 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.