Marks & Spencer Group plc Ordinary 25p (MKS)

Company overview

It was 1894 when Michael Marks met Tom Spencer and founded what is today a major UK retailer for clothes, food and home products. The group has over 900 stores in more than 40 territories around the world, over 600 domestic and 360 international. It is the largest clothing retailer in the United Kingdom, as well as being a niche player in the food sector focused on premium quality convenience foods. Marks and Spencer Group PLC is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

HL Comment (10 January 2012)

Against a backdrop of reduced expectations, the group's third quarter trading update (10Jan2012) proved somewhat mixed in tone. On the downside, and despite increased promotional activity, like-for-like sales for the group's General Merchandise sector declined by 1.8%, below analyst expectations of nearer -1.5%. However, on the upside, food sales on a like-for-like basis increased by 3.0%, ahead of estimates which were closer to +2.0%. Furthermore, total direct sales excluding VAT increased by 22.4%, while total International sales expanded by 8.1%, with both stores in India and Shanghai remaining a focus. In all, management profit guidance for the current full year remained unchanged. While a decision to invest in promotions for General Merchandise will result in a lower gross margin compared to previous guidance, additional savings generated by on-going tight management of costs are expected to counterbalance.

Negative Points:

• Required promotional activity within the group's General Merchandise arena is impacting on profit margins. Competition remains fierce, with both Supermarkets and rivals such as Next fighting hard for sales.
• Management outlook comments highlighted ongoing macro-economic uncertainty, with trading conditions expected to remain challenging.
• Although reined back, required investment in the group's store outlets is still expected to be between £700m to £750m this full year.
• Unlike some rivals, M&S does not have a material online food proposition.
• The M&S brand is considered to have relied on an ageing customer base for some time. The group is attempting to excite younger fashion orientated consumers, a move which could impact its more traditional customer base.
• Clothing retailers have previously suffered rising product costs thanks to higher cotton prices and wage inflation in key manufacturing countries like China. A fall in the pound also provides potential to impact.

Positive Points:

• Full year profit guidance remains unchanged.
• Food sales have exceeded expectations during the third quarter. The timing of Christmas may have assisted, while consumers' desire to enjoy premium food products during the holidays may also have played its part.
• Despite the immediate cost drag, the group continues to invest in its store base.
• International sales continue to expand, rising by 8.1% in total. Management noted a good start for its newly opened flagship store in Paris.
• Online sales are growing. Direct sales grew by 22.4%.
• At the half year stage, the company reported reduced net debt (£1.97 billion versus £2.2 billion as of half year results for the previous year).
• M&S owns most of its stores. Its property portfolio is valued at around £3.6 billion.
• The dividend payment remains attractive in the current low interest-rate environment. A dividend yield of over 5% is currently being paid.

Consensus:

On balance, market consensus opinion denotes a hold.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.