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Marks & Spencer - still work to do

Nicholas Hyett | 7 November 2018 | A A A
Marks & Spencer - still work to do

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Marks & Spencer Group plc Ordinary 25p

Sell: 152.25 | Buy: 152.40 | Change -0.50 (-0.33%)
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Marks & Spencer has reported a 2% rise in profit before tax to £223.5m, but that's being driven by temporary cost savings, with revenues actually shrinking 3.1%.

The dividend remains unchanged at 6.8p.

The shares fell 3.3% in trading.

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Our view

M&S's problems are multiplying.

Increasing online competition, and the high cost of maintaining a high street presence are hitting profit in the Clothing & Home business. The Foods business, previously a shining light, has also stumbled as input costs rise and online retailing penetrates the supermarket sector.

Meanwhile the economic climate is tough. UK consumer spending power and high street footfall, two crucial factors for a bricks and mortar retail business, are both weak. M&S is hardly alone facing that headwind, but other high street giants falling left and right isn't much consolation for investors.

M&S couldn't even catch a break for the holidays. Easter fell early this year, which was an added blow to sales figures in these results.

Nonetheless, it would be foolish to attribute M&S' decline to bad timing. Clothing & Home LFLs have been going backwards for years.

CEO Steve Rowe is the man with the plan - he's closing stores, reducing spending and increasing digital capacity. The problem is Marks & Spencer is a bit of a giant. Restructuring costs aren't small, and with more difficult decisions on the horizon, profits are due to stay broadly flat for now.

The difficulties in the Food business mean that while some new stores are still opening, the focus has shifted to improving those already up and running. This seems sensible, but it does put the pressure on Clothing & Home to reverse its recent poor performances. Given the decline in clothing like-for-like sales is speeding up, this is no small ask.

We're not saying it's all bad. M&S has taken its head out the sand and is working on all the right things. Time will tell if it's just a bit late.

M&S shares trade on 11.6 times forecast earnings per share, about 9% below its longer term average, and offers a prospective yield of 6.2%.

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Half Year Results

Revenues in Food declined 0.2% to £2.8bn, this was partly caused by the unfavourable timing of Easter this year. Like-for-like sales were down 2.9%. Gross margins fell 0.25 percentage points as a result.

Clothing & Home sales fell 2.7% to £1.7bn, with LFL sales down 1.1%. Gross margins fell by 0.2 percentage points due to increased discounting. Online sales growth is "ahead of market".

The International business saw sales fall 18.4% to £451.2bn after M&S exited some loss making markets and sold its Hong Kong business. Without that sale, international revenues rose 1.6%. Operating profit was up 3% to £62.1m.

Half year operating costs in the UK fell 2.1% to £1.7bn, with a 4.3% decline in store costs driving the decrease. That was partially offset by a 3.9% increase in spending on distribution and warehousing.

Net debt fell 12.3% year on year to £1.8bn as a result of tight capital expenditure control and slightly lower working capital.

The group now expects capital expenditure to be between £300m-£350m for the year- previously £350m-£400m.

Free cash flow was £241.2m (2017: £104.5m), reflecting reduced capital expenditure and lower interest and tax payments.

Clothing and Home sales space is expected to be about 4% lower at year end, previously 5%, with the store closure programme on track.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.