viewMarks and Spencer Group PLC

Is M&S boss Steve Rowe's honeymoon period over already?

In the manner of an Irishman giving travel directions, the advice for Steve Rowe seems to be: well, I wouldn't start from here.

Rowe could be in for the proverbial roller-coaster ride

Steve Rowe, the new boss of Marks & Spencer Group PLC (LON:MKS) is still in a honeymoon period, but the honeymoon could soon be over.

Market reaction to this morning’s trading update was lukewarm, with the shares off 4.7% at 332.5p in lunchtime trading, with even the normally bullish Shore Capital Markets having second thoughts, though it remains convinced Rowe is the retailer's best hope.

“Whilst we cannot be certain of delivery, we feel Mr Rowe is the best chance that M&S has had in a long-time to place the retailer on a better course for shoppers and shareholders' alike; however, it has been clear for some time that Mr Rowe is thinking quite fundamentally at this time, leading to adjustments that make for material change on a sustained basis; the second phase of the strategic thinking revolving around UK stores and internationalisation,” the broker said.

With much food for thought in this morning’s update, the broker has put its ‘buy’ recommendation under review, and acknowledged that it was probably a bit late in doing so, given that everyone knew some major changes were coming down the turnpike.

“We remain of the view that Mr Rowe is the right man for the job and we do not like ebbing & flowing with our stock recommendations,” the broker explained.

“Steve Rowe is dealing with the reality of M&S in a considered but also decisive manner to our minds. We believe that the component parts of his plan have individual and collective merit and as such do prime M&S for a brighter more profitable,” the broker said.

Liberum Capital Markets is in no doubt where it stands on the subject of Marks & Spencer’s shares. Sell ‘em, is its recommendation.

It wanted to see radical action from the retailer and in its view the strategic review is radical, albeit in a sort of middling way.

The company has committed to reducing floor space devoted to clothing, with the aim of improving profitability, but Liberum notes this is not a short-term fix: “the process will take five years”.

A 2.9% year-on-year decline in like-for-like sales in clothing “is still poor”, according to Liberum, while some £350mln of cash costs in closing some UK stores and exiting international markets, plus a one-off £127mln pension charge means there is no leeway for any additional cash to be returned to shareholders.

Cantor Fitzgerald is also a seller, describing the interim results as disappointing, and below expectations.

“However, Steve Rowe’s new strategy is sensible and focussed on preventing any further steps down in profitability. It is unlikely though to lead to a marked improvement in earnings over the medium term. It is very much geared to improving returns in the UK market while the ambitions for the overseas development of the M&S brand have been disappointingly tempered,” Cantor said.

“In the meantime, the stock does not look such compelling value after the downgrade and is now rated at 12.1x our FY17 earnings with a dividend currently yielding over 5%, which we believe is not guaranteed, if management decide to tackle its debt burden,” Cantor said, as it reiterated its ‘sell’ recommendation, even as it upped its target price to 300p from 250p. 

Quick facts: Marks and Spencer Group PLC

Price: 193.2 GBX

Market: LSE
Market Cap: £3.77 billion

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