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After its joint venture with Ocado, are M&S shares a buy?

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The last few years have been very disappointing for Marks and Spencer (LSE: MKS) shareholders. Since 2015, its share price has declined by over 80%, and many believe a further decline could be on the cards. But the recent joint venture with Ocado does show some promise, and as such, are M&S shares now too cheap to ignore.

Joint venture with Ocado

In February 2019, M&S and Ocado entered a joint venture agreement whereby M&S bought a 50% share of Ocado’s UK retail business for up to £750m. This gave the retailer a full online food delivery service to help modernise the company. Even so, last year, the news was met with a largely negative response. This was due to the dividend being cut by 40% in order to help fund the deal and the fact that the company had to issue more shares.

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Nonetheless, M&S products have been available on Ocado since the start of this month and there have been signs of promise. In fact, an Ocado spokesperson stated that “the M&S launch has been incredibly popular”. It’s also been noted that shoppers have been buying more M&S products than they did Waitrose products. As such, although many observers do still remain sceptical, this could bode very well for M&S shares.

Problems that remain

Despite this promise in the food sector, there are plenty of other problems in the rest of the business. For example, the Clothing & Home unit has struggled for many years, and has further declined this year. In fact, so far this year, overall sales in this department have fallen nearly 50%. 

There are a number of reasons for this disappointment. Firstly, its lacklustre online presence has allowed other fashion retailers to increase their market shares at the expense of M&S. This has included online retailers Boohoo and Asos. By buying stock very far in advance of a season, M&S has also struggled to react to trends, and this has meant that excess stock has to be heavily marked down. It has also led to significantly reduced profits. This faltering side of the business has therefore placed a major strain on M&S shares over the past few years, and evidently, there are a number of issues that need to be addressed.

Would I buy M&S shares?

In terms of addressing these issues, the retailer has made small steps. For example, it has made the necessary step of cutting 7,000 jobs. Although this is not good news for the workers involved, these streamlining efforts should allow the business to increase its longevity. The joint venture with Ocado is also a sign that the company is attempting to modernise.

Despite this, I’m still not buying. Although M&S shares are certainly cheap in the short-to-medium-term, I’m sceptical regarding the long-term future of the company. The current difficult economic climate should make the task of restoring the retailer to its former glory especially hard, and this means that the upside does seem limited. Instead, I’d prefer to buy a stock with better growth prospects.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and boohoo group. 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.

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