I last visited Marks and Spencer (MKS), or ‘Marks and Sparks’ as our family used to know, it early in January. The drama was whether M&S was finished as a general merchandiser – most particularly in the ladies wear department, where it seemed totally incapable of revising its one time reputation as a big supplier of women’s clothing to much of Britain.
A little history…
It is hard to recollect that Marks & Spencer was once regarded as the last word in revolutionary retailing in both theory and fact. It was part of the story of the rise of the UK’s first truly democratic consumer society after the end of Second World War austerity and rationing in the nineteen-fifties. There was no one to touch them. City analysts in the seventies and eighties visiting the M&S head office in Baker Street would hope to catch a glimpse of the store opening chart. A new store meant revenue and profits. It was almost simple arithmetic once you had that information.
Marks had succeeded and changed the preceding retailing model in the UK based largely on the 19th century revolutionary invention – the department store. Marks contributed the chain store model to UK retailing – a model that was pioneered across the continental market of the USA.
Marks’ contribution was the vertical integration of design, buying, manufacture and retailing. This gave enormous scales of economy which were added to each succeeding year by more stores selling more Marks & Spencer clothing. It is hard to think of Marks without its successful food retailing side, but at the outset there was no food retailing and of course no financial services. Its defect as a business model was the fact that you had to get the retailing end right to make the tail of manufacturer wag. It worked brilliantly for years. But then it began to weaken with a changing culture, tastes and more competition, which was magnified by globalization and the arrival of digital technology.
Previous assessment…
When I visited Marks as an equity investment last January, it was still grappling without great success with what had, by then, become seemingly incurable problems. It was still too much brick for too little click and the introduction of its own in-house web site did not seem to take off as planned; it could not get its clothing retailing genius back; it had been eclipsed in both technology and retailing success by Next and by infuriating contrast, kept on doing outstandingly well in food retailing. Inevitably, there were calls for M&S to quit general merchandising and clothing and to concentrate on food. But there was too great a weight of history and tradition for such a monumental retail desertion. Nor could investors bring themselves to sell the business to the owner of BHS, M&S’s original, ill starred rival, that was recently sold for a song and a pepper corn wrapped in silver foil; Marks is still with us.
At 454p last January, Marks and Spencer shares looked good value to my reading of the situation. Women’s fashion is a particularly volatile and bemusing business. However, I could not bring myself to believe that with its history and resources it could not crack its problems in dot.com retailing and clothing sales. I gave that a higher probability of success than the market which had brought the valuation of the shares down to a financially attractive valuation. Since then, the shares peaked at 565p this month and were 550p last seen. Over six months the share price has risen by 41%. So is it still a buy?
Most recent results…
Q4: the 13 weeks to 28th March 2015.
The company reported food sales up 3.7% (LfL plus 0.7%) with record St. Valentines Day sales; general merchandising up 1.3% (LfL plus 0.7%) with an improvement in gross margins. Marks.com sales moved up a reported 13.8%, which suggests that its own proprietary website is at last delivering for shareholders.
In the year to 28th March, earnings per share increased 1% to a consensus 32.2p, of which 17p (52.8%) was paid out in dividend. That was a clue to management confidence, because it was the first improvement in dividend for some years. If the market consensus of forward earnings is correct, there is more dividend improvement to come: a forecast 4% increase this year, an estimated 5.3% increase next year, followed by an estimated 8.5% the year after. This translates into prospective estimated dividend yields of 3.3%, 3.5% and 3.8%, with a current historic PER of 17, falling to one of 14.5 times consensus estimated earnings for the year ending March 2017. The Marks and Spencer share price has, on a 41% increase over six months, shown a clean pair of heels to both Next and ABF (both up about 8% in the same period). My conclusion is that Marks and Spencer shares having been cheap, now look well up with events and probably, short term, over bought. They are no longer obviously cheap in my opinion.
Fundamentals…
Recent balance sheets (the latest to 30th September 2014) showed equity of around an estimated 169p a share. There was no goodwill. Operations generated cash of £454 million to pay for an interim dividend costing £176 million and capital expenditure of £361 million. There was cash held of £109 million. Equity gearing was a heavy 82%.
Technicals…
Turning to the share price chart, and its “technical” analysis you will note that the share price is close to a five year high. It has just about entered new territory but is at the very top of its six month uptrend and the top of its five year up-trend. It has room to come back by about 6% to 5% on my subjective assessment, before making further progress. It looks more of a hold than a sale on that basis, but bear in mind that it looks quite highly valued for the moment and will brook little disappointment, should any appear with the next Q1 report. It now needs to consolidate its progress.