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Buy M&S over Next, are you serious?

Published: 12:38 24 May 2017 BST

picture of M&S store
M&S shares have soared this year while Next has struggled

Markets are supposed to be based on perfect knowledge.

So with Marks & Spencer PLC (LON:MKS) shares outperforming main rival Next Plc (LON:NEX) by more than 20% this year, does this indicate a major shift in the fortunes of the two high street giants.

Of course, over a five year view Next is still pummelling its erstwhile rival in almost every department, and especially womenswear.

But Marks & Spencer’s results hint at a more permanent rearranging of what had become a well-established high street order.

Of course, there is still a lot of baggage to wade through.

Marks may have reported a better than expected underlying profit of £614mln for the 52 weeks to 1 April, but that was down from £690mln a year earlier and included a hefty £437mln of one-off charges compared to £201mln a year ago.

To put that into context, those one-offs combined are more than two years worth of ordinary dividends and stripping them out, profits were a more modest £176.4mln (£483.3mln).

This year’s one-off list is long: £156mln for pay/pensions; £24mln for UK organisation; £52mln for UK store estate; £133mln for international store closures; £49mln for UK onerous leases; £44.1mln for M&S Bank PPI mis-selling.

So chief executive Steve Rowe’s restructuring has not come cheap, as he concedes, but the view clearly in the City seems to be that i) it was necessary and ii) he’s on the right path.

Clothing & Home sales rose 2.7% in the year as M&S as Rowe dropped aggressive price promotions and beefed up the quality. Food too rose by the 4.2% ignoring the impact of a late Easter.

And as Rowe points out, even with the restructuring its cash flow was strong hence a maintained dividend of 18.7p for a yield at 393.6p of 4.7%.

Next, meanwhile, has just reported its first annual profits fall for eight years and chopped its profit and sales guidance for the current year after reporting a 3.0% drop in first-quarter sales, which were at the bottom-end of its range of expectations.

Even so, it is still throwing off cash, a £255mln surplus this year to be exact, which Next has already promised to return to shareholders through special dividends of 45p per quarter.

A bigger test (for both) will come this year with conditions on the high street expected to remain tough and online competition raisin relentlessly.

Tom Selby at AJ Bell also notes; “For all of the progress made analysts expected M&S’ (underlying) pre-tax profits to come in broadly flat for the next two years.”

Even so, for once, there does not seem a lot to choose between the two retailers and while you can argue that 's only because Next is struggling, for M&S and Steve Rowe that in itself is a major step forward.

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