A fall in clothing and food prices was behind a drop in inflation figures to 0.3% in November, according to this week’s figures from the Office for National Statistics. Our stock of the week, Marks & Spencer (MKS) sells both clothes and food, a mixture that puts it in competition with the likes of former stock of the week Tesco and high street and online fashion retailers. Food retail has had a boost during this year’s multiple lockdowns and the largest listed grocers are posting strong sales figures this year, but clothing has suffered from the closure of physical sales outlets.
Marks & Spencer has found that balancing act between food and clothes difficult in recent years, and that’s been reflected in financial results and a weakening share price. The latest set of half-year results in November, revealing a pre-tax loss of £87 million, showed the outperformance of food and weaker sales of clothes and homeware products. With many commuters staying at home for much of the year (and not needing to upgrade their work wardrobe), Marks & Spencer like other retailers dependent on city and centre footfall, has been hit by this sudden change in consumer behaviour.
“In a fiercely competitive United Kingdom retail marketplace Marks & Spencer Group's, underperformance is yet another sign of the difficulty in developing competitive advantages in the retail sector, leaving it exposed to disruption from new players such as price-led discounters [such as Aldi and Lidl] and online retailers,” says Morningstar retail analyst Ioannis Pontikis, adding that the company has no economic moat with a very high uncertainty rating.
Pontikis also says that the company’s turnaround plan, as unveiled in 2016, has proved to be slow going and will likely be delayed further by Covid-19 disruption.
On the plus side, Marks & Spencer’s joint venture with online retailer Ocado (OCDO), known as Ocado Retail, is off to a strong start and makes strategic sense for M&S given Ocado’s strength in digital food delivery, Pontikis says. “We think the joint venture will enable M&S to profitably grow its specialty food product sales through Ocado’s technology platform, while at the same time facilitate its transition to a more fully fledged supermarket offering, crucial for online retail economics.”
Marks & Spencer shares are trading at 140p, a touch below the 157p fair value assigned by Morningstar analysts. For long-term shareholders, the last five years has been tough: the shares hit a post-financial crisis peak of around 560p in spring 2015 but have been on the downward slide since then, and have yet to reclaim their pre-Covid levels around 200p. Mark & Spencer is now valued at just under £3 billion – but in 2004 Sir Philip Green, whose Arcadia Group has just gone into administration, was willing to table a £9 billion offer for M&S.
This mega-deal fell through but the M&S brand still has clout as a retailer of affordable premium products, appealing perhaps to an older (and wealthier) demographic who remember the golden age of the British high street. Pontikis says: “M&S has all the right elements for the plan to yield positive results. A strong British brand with a long history, significant store footprint, an unpenetrated online opportunity and a reputation for one of the best quality own-brand product portfolios (especially in food), are the foundations that management should build on.”
In the past, Marks & Spencer was prized for its dividends, but the company – along with many in the market – scrapped its dividend for 2020/2021 in the teeth of the March crisis.
