We relaunch coverage of Marks & Spencer MKS, with a no-moat rating, Standard Capital Allocation Rating, and Medium Uncertainty Rating. Our fair value estimate is 342p*, which places the stock in 2-star territory. Shares are currently trading at 388p, having risen 40% this year. While headwinds in the UK have dampened consumer confidence in recent years, we see an improving environment on the horizon that should benefit M&S. Still, we prefer consumer staples names under our coverage with more defensive qualities.
In a fiercely competitive UK marketplace, Marks & Spencer has underperformed for the better part of a decade, highlighting the difficulty in developing competitive advantages in the apparel and grocery sectors. The 200-year old firm is exposed to disruption from new players, such as price-led discounters and online retailers. In 2016, a fresh transformational plan was implemented. Although slow initially, post-pandemic progress has been material, with new management at the helm in 2022.
Marks & Spencer Turnaround is Working
We think the turnaround has been successful so far. Transformative initiatives have included reassessment and optimization of the store base, supply chain overhaul, price resetting, and enhancing online capabilities. Within the clothing and home segment, M&S has narrowed its product portfolio while improving availability.
In food, M&S is expanding its offering toward a more extensive grocery shop from selling one-off specialty items. While these actions have begun to bear fruit in the form of share gains, there is still a long road ahead for a fully transformed M&S. In addition, we don’t see competition in either segment abating any time soon and thereby expect continued investment in order to keep up with peers.
Morningstar Metrics for Marks & Spencer
- Fair Value Estimate: 342p
- Morningstar Rating: 2 stars
- Economic Moat: None
- Morningstar Uncertainty Rating: Medium
- Analyst price targets range from 400p to 458p
Marks & Spencer Shares Rallied Since 2022
Ocado Deal Makes Strategic Sense for M&S
The group’s acquisition of a 50% stake in Ocado’s online grocery business makes strategic sense for M&S, given its inferior in-house online capabilities. The joint venture will enable increased food sales and further facilitate its transition to a more holistic supermarket offering. We forecast M&S’ revenue will grow at a 3.5% compounded annual growth rate over the next five years. We expect food to be the biggest driver, growing at a 4.4% compounded annual growth rate over the next five years. Here, like-for-like sales growth will be supported by increased Ocado Retail sales and store optimization, which entails store openings and increased product lines.
In the clothing and home segment, we forecast 1.7% compounded annual growth rate over the next five years. We expect mid-single-digit online revenue growth to offset slowing in-store sales growth. We expect its operating margin to reach 7.3% by fiscal 2029, up from 5.5% in fiscal 2024. Our forecast bakes in roughly £450 million in cost savings and a positive volume/mix contribution. We also anticipate that the margin dilution effects from the Ocado Retail joint venture will deteriorate over time.
- The analyst’s fair value estimate for Marks & Spencer of 342p is the lowest among sell-side analysts tracked by Morningstar. Other price targets range from 400p to 458p.
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