Monday 23 July 2018

Share watch: 'Curious decline' of M&S shows no sign of stopping

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John Lynch

Since the onset of the recession 10 years ago, the British retail giant Marks and Spencer has been in a curious decline. Brand experts are not predicting a recovery any time soon. On the contrary, they are forecasting slow, steady and inexorable damage to the M&S brand because the company that everyone admired so much in the 20th century has lost its way in the 21st century. The same experts are also saying that Brexit will turn the knife in the M&S wound. They say it is probably too stuck in the 'middle' (middle price, middle range, middle class) to help it successfully negotiate the new market-place realities in the UK.

Since the onset of the recession 10 years ago, the British retail giant Marks and Spencer has been in a curious decline. Brand experts are not predicting a recovery any time soon. On the contrary, they are forecasting slow, steady and inexorable damage to the M&S brand because the company that everyone admired so much in the 20th century has lost its way in the 21st century. The same experts are also saying that Brexit will turn the knife in the M&S wound. They say it is probably too stuck in the 'middle' (middle price, middle range, middle class) to help it successfully negotiate the new market-place realities in the UK.

The marketers have been wrong in the past and may be wrong about M&S this time. The 133-year-old fashion and food retailer is an institution after all. It has 85,000 employees, and is valued at £5bn (€5.7bn). However, its new chairman, Archie Norman (ex-CEO of Asda and ex-Conservative MP), has himself conceded that the company has been "drifting for 15 years". But has he the ideas to halt the drift or make the group as admired and meaningful as it was in its prime, 30 and 40 years ago?

The top job at M&S has been stuck in a revolving door in the past 15 years. There have been seven different chairmen and chief executives. On only one occasion, in 2008, have profits surpassed those recorded 20 years ago.

There is little wonder the brands experts have despaired. In 2000 it dropped its iconic St Michael brand, and astonishingly replaced it with 13 brands, only one of which survives.

The company also set its face against the practice of using UK manufacturers, citing rising costs. The British manufacturers were replaced by imported goods from low labour-cost countries. Unfortunately, long supply chains are inflexible.

While the fashion side suffered, the M&S food business (60pc of group revenues) became its bulwark. Unfortunately, food revenues have started to slip and it faces 'strong headwinds' from growing online competitors, including Amazon. It is said that its food offerings are not new enough, not classy enough and not cheap enough. It appears food trends have become as fickle as fashion.

The comany's revenues last year at £10.6bn (€12bn) were its highest in the last five years. The group's operating profits were off by 10pc, but net profits fell a whopping 63pc. This was due to charges following a number of store closures. As a result, its shares have been on a downward trajectory.

The M&S share price, at £3.07p, is almost half that of two years ago, but dividends, at 18.7p, were static. Results for the quarter to Christmas show revenues falling in both clothing and food, a concern to investors. While in recent times the company has been given a helping hand by UK inflation, it still intends pulling back from its loss-making stores overseas and is on a sweeping programme of relocating, modelling or closing stores.

The programme could see the company move to out-of-town shopping centres, or even stores in retail parks.

However, the group's cash flows are strong and it is paying a generous dividend which should continue.

Of some concern to investors is the exiting of high-profile management in clothing. Some shareholders worry that this could hinder its recovery.

There has been some chatter that Marks and Spencer and Next should get together. Such a merger would address their excess capacity and help with the declining traditional business model. With both market values almost the same, it would be a joining of equals.

The concept makes sense but those in the know say it's unlikely. There are not many compelling reasons to invest in the group, but the company looks more attractive on the basis of cash flow than profits. After the mixed Christmas results, expect announcements of store closures and staff lay-offs.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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