Is M&S finally back in fashion?

In the words of that great retailer Mr Grace of Grace Brothers Department Store, in the much loved BBC comedy “Are You Being Served”, Marks & Spencer (MKS) has done very well.

As a long term bull of the M&S recovery story, I am pleased to note that Marks & Spencer shares over the last year have risen by 32%, beating the mere 15% rise in the Next (NXT) share price over the same period. I see that I judged the shares as a hold last month, when the share price had reached 554p, observing that it was getting close to the top of its longer capital appreciation trend.

The share price is now – last seen – 590p. The extra 6.4% capital appreciation was indeed worth holding on for; but 590p takes us very close to the top of the rising price trend that has been in place since last October 2014.

However, the “technical” downside to my perceived support point on that trend, implies a modest 5% to 6% relapse in the share price, which investors should view as a buying opportunity – if it comes – because of the results for last year and the fact that the uptrend still looks as though it is in place. So the shares are a hold at this level and arguably a buy if they do come back towards 560p.

But enough of the “technical” stuff; what about the fundamentals? The management made enough progress last year to grow underlying profits before tax by 6.1% to £661 million. Along with this return to profit growth, Marks last year also returned to the fraternity of dividend increasing companies: the final dividend was raised 7.4% to 11.6p (a final dividend yield of nearly 2% at a share price of 590p); and the full year annual dividend by 5.9% to 18p, making for a historic annual dividend of 3%. That makes these shares a proper investment once again, with the prospect of more dividend growth to come.

As you examine these annual results, you will note that all parts of the business showed progress apart from the international division, which is still relatively small and trades in troubled places like Russia and the Ukraine. The international side was also hit by a strong pound sterling exchange rate against the Euro as well as the Rouble. Basically, the very successful food side is growing through store outlet additions and maintained gross margins; the general merchandising side by holding store outlet numbers steady and improving gross margins. The Marks.com business has been an in-house web site under proprietary management for a year. In Q4, Marks.com sales were growing reassuringly. It seems ready to make a full year’s operational contribution for the first time.

Having reformed the business, the management now expect to make it a more efficient money machine, generating more cash, from lower capital expenditure, better buying and better distribution. It seems a rational and balanced approach in which general merchandising’s progress is marked by improved margins whilst the already successful food side maintains margins but increases high street presence to meet perceived public demand for the differentiated food offer of Marks & Spencer. The Marks.com business seems in a good position to now concentrate on more sales revenue from more customers.

I remain optimistic longer term about the Group because of the progress this year which underwrites the prospect of more progress to come. I suspect that recent consensus market estimates of future profits and dividends may be raised this year. Those I looked at in April had earnings estimated to improve by 8% this year and 8% next year. Dividends were estimated as increasing to 18.65p next year and 20.24p next year. At 590p a share, that values the shares on estimated prospective PERs of 16.8 and 15.5 and on forward estimated dividend yields of 3.2% and then (next year) an estimated 3.4%. My hunch is that these forward estimates may be upgraded a bit after these last results. Shares for buying if they come back a bit as the chart suggests they should.