Hargreaves Lansdown

Marks & Spencer Group plc (MKS) Ordinary 25p

Sell: 563.50pBuy: 564.00p04.00p (0.70%)
FTSE 1000.93%
Market closedPrices as at close on 17 April 2015Prices delayed by at least 15 minutes | Switch to live prices |
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HL comment (2 April 2015)

Marks and Spencer shares rose by around 4% in early morning trading after it reported its fourth quarter results for the 13 weeks to 28 March 2015. UK sales grew by 2.7% in the quarter and Like-for-like (LFL) sales grew by 0.7%. This was a material improvement on the third quarter, where total and LFL sales fell by 1.1% and 2.7%, respectively.

The improvement was driven by a return to growth at General Merchandise (GM), which has been the thorn in the side at M&S over recent years, having registered 14 consecutive quarters of LFL sales declines prior to today. Improving the performance of this division has been a key priority for Chief Executive, Marc Bolland. Today M&S reported that LFL GM sales grew by 0.7% in the fourth quarter (total sales were up 1.3%). This compares very favourably with the 5.8% decline recorded in the third quarter, which was impacted by unseasonably warm autumn weather and disruption at the group's distribution centre in Castle Donington.

The issues at Castle Donington now seem to have been overcome. Following three consecutive quarters of falling online sales, M&S.com returned to growth in the fourth quarter, with sales up by 13.8%.

The food business continued to perform well in the face of intense competition, with sales up 3.7% and LFL sales increasing by 0.7%. M&S had a record Valentine's Day and launched over 350 new products over the quarter.

The International division continued to be weighed down by macro-economic headwinds in Russia, Ukraine and Turkey, coupled with further weakening in the Euro, although key priority markets such as India continue to perform well. This contributed to a 6.3% fall in international sales (-3.8% at constant currency).

M&S continues to manage costs tightly and now expects operating costs to increase by circa 1.5% for the full year, an improvement on its previous guidance of +2.0%. The General Merchandise gross margin improvement was also said to be on track with guidance for the year unchanged at +150 to +200 basis points.

Commenting on the results, Chief Executive, Marc Bolland, said:
"We have made strong progress over the quarter. In Food we delivered another excellent performance, with sales growth ahead of the market. We continued to deliver on General Merchandise gross margin, and are pleased that we have achieved this whilst also improving General Merchandise sales. M&S.com has returned to growth, as planned, with further improvement in customer metrics."

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Our view:

Marks and Spencer's Chief Executive, Marc Bolland will be mightily relieved to have ended a difficult year on a high. The General Merchandise division has finally returned to growth after more than three years of falling like-for-like sales. Online sales are also back on track, having fallen in each of the previous three quarters. The performance of the food business continues to outshine competitors, and cost and margin improvements are progressing well. All in all this is a good quarter from M&S, which is something we haven’t been able to say too much of late.

The key question for investors is whether the improvement in General Merchandise can be sustained. Here, we are still sceptical. Since taking over as CEO from Sir Stuart Rose in 2010, Marc Bolland has tried hard to turn things around, essentially seeking to rediscover the reputation for quality that made the group so successful in the first place. Success so far has been based on cost savings and margin improvements, both of which we welcome, but ultimately do little to get more customers through the door.
 
One swallow doesn't make a summer and we're still not convinced that M&S has rediscovered a winning formula. The UK high street is immensely competitive, arguably more so than it has ever been, and M&S still struggles to draw in the younger crowds. If next season's clothing ranges prove a hit then maybe today’s improvement in General Merchandise sales can be sustained, but it’s still too early to call.

Following a strong run the shares now trade on a price to earnings ratio (P/E) of 15.9x, which is broadly in line with UK peers and is around a 30% premium to its long run average. The prospective yield of 3.3% (variable and not guaranteed) is reasonably attractive but is at the lower end of its historical range. We would expect to see some earnings upgrades following today's numbers, but nevertheless the shares look fully valued at these levels. Next, our favourite UK retail name, has just reported 15% earnings per share growth for FY 2015, trades on a similar P/E and has a rather better track record of growing shareholder value.

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All yield figures are variable and not guaranteed.

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