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Is the Marks & Spencer share price a buy after 45% one-year fall?

One of the first things I do after the markets open each day is check the biggest early risers and fallers, and on Thursday morning I was pleased to see N Brown Group (LSE: BWNG) top of the heap with an 8% share price hike.

I’m pleased not because I own any (I don’t) but because N Brown is a retailer and it’s really nice to see one of those doing well for a change. The company, which owns a range of brands including Simple Be, Jacomo, JD Williams and Ambrose Wilson recorded a first-half rise in adjusted EBITDA of 4%, with adjusted EPS up 6% to 8.87p. That was after total revenue actually fell, so it seems overall profitability is improving.

Online

The key change for the firm is its transition to online selling and away from traditional stores and print catalogues, with 84% of its product revenue now coming from digital sources.

Chief executive Steve Johnson told us that full-year expectations are unchanged, and forecasts suggest an 8% increase in EPS and a well-covered 6.4% dividend yield.

The one big concern I have is the company’s massive, and growing, net debt mountain, which has increased by 14.5% to £481.6m. That’s nearly 4.5 times annualised adjusted EBITDA, and I tend to think a company has no business paying big dividends while shouldering that level of debt. Though the interim dividend was held level, I wouldn’t be at all surprised to see a cut in the future — and I think one is needed.

The stock’s forward P/E is exceptionally low at under five, and that might well provide enough of a safety buffer to compensate for the debt risk. But whatever their valuation, I won’t buy heavily indebted retail stocks.

Recovery?

Something else I seem to have been doing since the dawn of my investing days is checking to see if Marks & Spencer (LSE: MKS) has got its turnaround under way yet. And, even after all these years, I’d say that’s still very much a maybe.

The high street chain’s unceremonious dumping from the FTSE 100 hasn’t helped, and the share price is now down 45% over the past 12 months, and down 60% over five years. And while a forecast dividend yield of 6.3% might appear attractive, it’s really only the fallen share price that makes it look good — those who bought the shares five years ago would be looking at an effective yield of just 2.6% on their purchase price.

M&S’s management team has been through upheaval too. First came the departure of managing director of Clothing and Home, Jill McDonald. And while that particular exit might not have surprised industry insiders, the announcement in September that CFO Humphrey Singer is leaving after just 14 months in the job came as a shock.

The Ocado thing

The more I think about M&S’s £750m tie-up with Ocado, the more uncertain I am about it. On the one hand, a move in the food direction might make a lot of sense, as food has always been seen as one of the company’s key strengths. But on the other hand, I can’t help seeing it as a high-risk gamble.

Over all these years, I’ve never been sufficiently convinced to buy M&S shares. And even though I could buy some today on a forward P/E of only nine, I’m still keeping away.

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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.