The recent profit warning from ASOS PLC (LON:ASC) fuelled a sell-off in the retail sector that wasn’t restricted to the online fashion groups.
It also prompted investors big and small to ask one pertinent, very pertinent question: If ASOS has been hit by a downturn in consumer sentiment, then how bad is it for the rest?
READ: ASOS shares slump on profit warning as it succumbs to challenging retail market
ASOS, after all, is a lean, mean retailing machine; an internet phenomenon with none of the legacy issues of the established bricks and mortar shops group.
On January 10, we’ll find out just how kind or terribly unforgiving the market has been to Marks & Spencer Group PLC (LON:MKS). It will also represent a key make-or-break milestone for its chief executive Steve Rowe.
The read-across from online to the mainstream quoted retail stocks is difficult.
We already know Debenhams PLC (LON:DEB) is struggling, while at the other end of the spectrum, Next PLC (LON:NXT) has been probably the most resilient of the major shop chains.
Somewhere in between on the spectrum lies Marks, that byword for faded glory; a company trying to make itself relevant to the modern consumer that is currently undergoing a cost-cutting revamp designed to shore up profitability.
What would it take to blow all this off course? Very little, one suspects.
On a knife edge?
At the moment, M&S’s fortunes are balanced on a knife-edge. Its net debt as at the last results was £1.78bn and falling. This, according to RBC Capital in a recent note, imbued confidence in the dividend, which provides investors with an inflation-busting 6% yield.
Nobody is currently predicting this, but significant deterioration in trade could put paid to such a generous shareholder distribution.
But Marks has more pressing immediate worries than the divi. It is very much at the whim of the UK consumer and the last litmus test (on November 29) revealed confidence to be at an 11-month low with Brexit-wrangling dogging already fragile sentiment.
Sterling has also been a drag for the department store chain as M&S imports much of its clothing. The weaker pound has meant that new clothes will have cost more than this time last year, eating into already perilously thin profit margins.
Butting up against the tough and determined competition, Marks’s food division has opted to drop its prices, which again will bite into the bottom line, even if it does help boost revenues marginally.
Perennial problem
And then there are the perennial problems. For years now, the company has struggled to make itself relevant to new generations while maintaining the loyalty of an ever-shrinking group of middle-class, golden years shoppers.
Nowhere is this internal struggle more evident than in womenswear, which has been a perennial problem child.
At the same time, M&S wants to be a leaner, fitter business. Under CEO Rowe the company hopes to unearth £350mln of cost savings in the next three years by closing the least profitable stores of its portfolio.
Analysts believe he has also scope to cut central costs further, given these have increased substantially in the last decade.
By all accounts, Rowe is a very able, likeable retailer. “But Stuart Rose he is not,” one source told me, referring to the suave and unruffled public persona portrayed by the former M&S chairman.
New Marks King?
So, what happens if Rowe is hit by an ASOS-style trading slump? Well, there’s help at hand for him in the form of Justin King, the former Sainsbury chief who was appointed to the M&S board as an independent director last week.
Before joining Sainsbury, King headed up the M&S food operation and before that worked with chairman Archie Norman at ASDA.
Some might say the 57-year-old, who will retain his role as deputy chairman at private equity firm Terra Firma, is a ready-made replacement for Rowe if it all goes wrong over what looks likely to be a tricky festive period.
Marks is scheduled to reveal how it has fared over the Christmas period on January 10; however, it is likely we’ll know much earlier if the wheels have fallen off the Marks bogey.