Sales finally moving in the right direction
Marks & Spencer's third quarter update, which includes the important Christmas period, sees like-for-like (LFL) sales in the Clothing & Home division return to positive territory. With the Foods division increasing sales too, the shares rose by 3% the morning of 12 January.
After last year's disappointment, pulling in stronger sales this Christmas may not have been the most difficult of tasks. However, in the context of how things have been going for the group, even clearing the low bar of 2015 was welcome news.
Marks & Spencer has had problems with its clothing division for years. Having already refocused the range on offer, November brought the latest instalment of the M&S turnaround plan: a restructure of the store estate. The group will end up with 60 fewer Clothing & Home stores, and many of the remaining shops will be getting a revamp. The loss making international business is also being shaken up, with the group instead adopting a franchise model overseas.
The core of M&S' problem is that despite its best efforts, many, especially the younger generations, still find the group's clothing offer unappealing. Vast, empty shops are doing little to improve the company's image. A change seems sensible.
However, diagnosing the illness and applying the cure are very different things. The reality is that removing unwanted stores doesn't come cheap. With the changes to the store estate likely to come with a bill for at least £500m, special dividends are off the table for the foreseeable future.
Reducing shareholder returns raises the stakes for Mr Rowe. Unfortunately for him there are some pretty strong headwinds blowing in the retail sector, not least the higher cost of importing textiles as a result of sterling's weakness. The years when 'Made in Britain' tags adorned almost all of its clothes are lon g gone, so M&S will be affected by this. Margins may well be held back going forward.
On a more positive note the Food division, which generates over 50% of group revenue, has performed strongly in recent years. Expansion is set to continue, with plans to open around 200 Simply Food Stores by the end of 2018/19. M&S shares now at around 11.8 times forecast earnings per share, and offer a prospective yield of 5.6%.
Third quarter trading in detail:
With last year a 53-week financial year for the group, sales are reported for the 13 weeks to 31 December 2016, compared to the 13 weeks to 26 December 2015. M&S says that this has had the effect of boosting reported sales in Clothing & Home by 1.5% and 0.3% within Food.
The Foods business continues to gain market share. The opening of new space was the driver behind the 5.6% sales growth in the Food division, with LFL sales growing by 0.6%.
Total sales in the Clothing & Home division rose by 3.1%, with LFL sales increasing by 2.3%. M&S says better ranges, availability and pricing helped to improve performance in a difficult marketplace. The group held firm on pricing during the period, with many fewer promotions, particularly over the Black Friday weekend.
International sales were up 2.9% at constant currency, benefiting from earlier shipments of spring ranges to franchise partners.
Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.