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M&S faces FTSE 100 relegation in index's quarterly reshuffle

Marks and Spencer's clothing brand needs a complete refresh and its online offering needs sorting out fast, according to Neil Wilson, chief market analyst at Markets.com

M&S
M&S has kept investors happy with a dividend yield of more than 6%

Marks and Spencer Group PLC (LON:MKS) shares jumped on better-than-expected annual profits on Wednesday but the retailer is still facing possible relegation from the FTSE 100.

The retailer has had a spot in the FTSE 100 since the index began in 1984 but all that could change next week when the index’s quarterly reshuffle is unveiled.

The M&S share price would have to fall by 10% from yesterday’s closing price by next Tuesday, when the review of FTSE 100 components is carried out, for the company to automatically drop out of the index. 

“However an appreciation in the share prices of a few other companies of a similar size could nudge it out of the picture,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.

“In that respect M&S is a bit like an underperforming football team, who has left relegation in the hands of those around it in the table.”

M&S was second from the bottom of the FTSE 100 after G4S PLC (LON:GFS) as of yesterday’s close, Khalaf pointed out.

Profit beat and juicy dividend lifts M&S shares

Nevertheless, its shares received a boost today as underlying pre-tax profits for the year to end of March 2018 fell 5.4% to £580.9mln but beat analysts’ estimates of £573mln.

The company also left its dividend unchanged at 18.7p, leaving investors with a yield of more than 6%.

READ: M&S profits plunge on store closure costs but shares surge as results beat forecasts

Including a one-off charge of £321.1mln for its store closure programme, pre-tax profits plunged 62% to £66.8mln.

The restructuring charge did not take the market by surprise as M&S had already announced yesterday that it was accelerating its reorganisation with the closure of 100 UK stores by 2022.

Benefits of M&S restructuring to take time

“A sharp jump in Marks & Spencer’s shares this morning means that the retailer got its news management right, by releasing the details of big store closures ahead of its results, but the numbers themselves are nothing to be proud of and show just how much work there is still to be done,” said Russ Mould, investment director at AJ Bell.

“At least the accelerated pace of change suggests that chairman Archie Norman is just starting to get going and help chief executive Steve Rowe with the tough decisions that need to be made.

“However even Mr Rowe admits that it is going to be a long haul, as the goal now is to deliver sustainable, profitable growth ‘within three to five years’.”

The store closures are part of the company’s plan to reduce the amount of space devoted to its clothing and home division after struggling to improve sales. M&S aims to reduce space for clothing by 5% by the end of this year.

“Collapsing footfall on the high street is one thing, but the clothing brand needs a complete refresh to get younger shoppers back,” said Neil Wilson, chief market analyst at Markets.com.

“Online needs sorting fast and significant investment here is the priority.

“You can boost profits with fewer stores only if you can drive online sales growth and on that front M&S is well behind.”

Like-for-like clothing and food sales fall 

Clothing and home revenue decreased 1.9% for the year as efforts to turn around the business were undermined by a tough retail market and heavy snowfall in the fourth quarter, which kept customers away.

The group's upmarket food division, which has previously mitigated poor clothing sales, has also started to show signs of weakness with like-for-like sales falling 0.9%.

Premium offerings from other supermarkets have hit the company’s food sales in recent years.

On top of that, consumers are spending less due to higher inflation and sluggish wage growth.

M&S said its food margin fell 140 basis points during the year due to a weaker pound pushing up cost inflation. It expects another decline of up to 50 basis points in fiscal year 2019.

“This outlook won’t give much comfort to investors as the company has been muddling along recently,” said David Madden, market analyst at CMC Markets.

M&S profits to drop again in 2019

Liberum maintained a ‘sell’ rating and target price of 250p on the stock. For 2019, it expects revenue of £10.83bn and pre-tax profit of £543mln.

”The need to service customers on two fronts, in store and online, sees an increase in cost/sales resulting in group EBIT margins falling from 8.2% in 2012 to 5.5% in 2020, on our estimates,” the broker said.

“The clothing market for M&S will continue to be squeezed by fast fashion, online, brands and value. Ongoing structural pressures mean that any path to recovery for M&S continues to look long and uncertain.”

Quick facts: Marks and Spencer Group PLC

Price: 100.45 GBX

LSE:MKS
Market: LSE
Market Cap: £1.96 billion
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