Full year results from high street stalwart M&S made for gloomy reading, prompting some investors to question whether the retailer can hold its place in the top flight.
Marks & Spencer (MKS) has held a place in the FTSE 100 since it was launched in 1984 but, with the next reshuffle due to take place next week, the £4.7 billion business is teetering dangerously close to the relegation zone.
M&S, which earlier this week announced it would close 100 stores by 2020, revealed that pre-tax profits were down 62%. Like-for-like sales in its food division, which has been the strongest part of the business, fell 0.6% and gross margins were down 140 basis points.
In the struggling clothing and home side of the business, sales fell by 1.6% although margins edged up 50 basis points, after a decision to reduce discounting. Overall sales, hurt by poor weather and a weaker pound, dropped 2.1% in the fourth quarter of the year.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “M&S is simply struggling to make progress in a world where a compelling mobile app is every bit as important as a presence on the high street.
“In the last year traditional retailers like Marks have faced a perfect storm of rising costs, a constrained consumer and the relentless growth of online competition.”
Yet, despite the less-than-positive outlook, M&S shares climbed as much as 6% in early trading on the promise of a chunky dividend payout of 18.7p a share – equivalent to a yield of around 6%, the twelfth highest yield in the FTSE 100.
Russ Mould, investment director at AJ Bell, says: “The retailer has got its news management right by releasing the details of big stores closures ahead of its results, but the numbers themselves are nothing to be proud of.”
M&S chief executive Steve Rowe says the first phase of the firm’s transformation plan is well underway but there are still a number of structural issues to address.
He adds: “The team is now tackling transforming our culture to make M&S a faster, lower-cost, more commercial, more digital business. This is vital as we start to leverage the strength of the M&S brand and values across a family of businesses to deliver sustainable, profitable growth in three to five years.”
10 Short Positions
But whether the firm can deliver of its plans remains to be seen. Certainly, a number of professional investors are betting against the retailer, which was founded in 1884. Currently, there are 10 short positions in the stock, totalling 12% of its share capital. The largest position, at 2.21%, is held by Marshall Wace, followed by Pelham Long/Short Master fund at 1.8% and Citadel Europe at 1.4%.
Khalaf adds: “Until recently the food business was the bright spark which kept hopes for growth from M&S alive but now that seems to have dimmed too and the retailer has had to scale back its programme for opening more food outlets.”
The division is suffering from a growing trend towards home delivery for groceries, as well as feeling the squeeze on margins from weaker sterling.
But shares will have to have a very poor week for the stock to be automatically booted out of the top flight at next week’s reshuffle – or a rally among its rivals at the bottom of the index could force it out.
To be ejected from the FTSE 100 a company must see its market capitalisation drop not to 101st largest in the UK but to 110th place. Similarly, for a firm to be promoted into the top flight its market capitalisation must reach the top 90 companies by size. On that basis, M&S shares would need to drop around 10% by next Tuesday for it to be at real risk of relegation. Also, in the running for exclusion are Severn Trent and G4S.
Likely candidates to gain admission to the FTSE 100 include Ocado (OCDO), GVC (GVC) and Weir Group (WEIR).
Khalaf says; “Relegation from the index will have limited impact on the share price but it would be a hugely symbolic moment, made more poignant by the fact that Ocado looks likely to enter the index. It paints a picture of the old economy and the new, passing each other in very different directions.”
Helal Miah, investment research analyst at The Share Centre, adds: “The harsh reality is that the retail environment continues to weigh heavily on this well-known and respected retailer. While, there have been some encouraging signs that the new management team on the clothing side of the business is having some impact, competitive pressure from rivals and relatively weak consumer sentiment has left growth uninspiring and M&S is likely to find itself among the relegation places as a result of weak figures in its all-important food business.”
