The giant has been slain! After 35 years in the FTSE 100, one of its stalwarts, Marks and Spencer (LSE: MKS), is to be dropped from the index later this month. This marks a potentially critical moment in the company’s enduring decline. It will move into the FTSE 250 because of the huge fall in its market value, which has been driven by a falling share price. The shares have dropped by one-third in the last 12 months and by a staggering 54% over the past five years.
What are the issues?
The immediate issue for the share price is that being dropped from the FTSE 100 means some index trackers will be forced to drop it, which may depress the shares further.
On top of this, there are more general fears around the future of retail and the high street. This does little to encourage investors into putting money into store-heavy retailers like M&S. The shape of retail is also changing with consumers seemingly preferring discounters that have been winning market share in recent years, especially in foods.
As Kantar, one of the leading trackers of supermarket share shows, Aldi and Lidl have gained 1.1% and 0.9% market share respectively since the start of 2018. Kantar doesn’t track M&S, but using Waitrose as a proxy for upmarket groceries, it’s clear that market share has been lost at the upper end over the same timeframe as consumers are moving away from premium price food stores.
Then there are the problems successive M&S CEOs haven’t been able to address. “There has been a decade-long complaint by investors and customers that it has failed to revamp its clothing lines, especially within womenswear, and lacks appeal for the younger generations,” said Helal Miah, from the Share Centre.
This contrasts with the appeal of high street rival Primark and online competitors such as Boohoo. It says a lot about either the quality of the management, the company culture being too bureaucratic and resistant to change, or the ingrained nature of the problems that M&S can’t seem to get a grip on the problem – especially given how important clothing is to the group’s profits.
In my view, the £750m deal with Ocado and the leadership of Archie Norman as Chairman of the business are potential red herrings. The former looks like too little too late and there are concerns M&S overpaid to get Ocado on board. The latter relies on the reputation and ability of one distinguished retail veteran to overcome the entrenched problems at the retailer. It seems unlikely that any individual has the ability to make such a difference. Both of these are positioned as positives for investors but I don’t think they compensate for the many issues that M&S faces.
Although the shares may look cheap after the sharp share price fall, on this occasion I think that low price is understandable. M&S is no longer the revered brand it was and I think there’s little to stop the share price sinking further. I’d avoid.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.