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Marks and Spencer: mixed picture for analysts and in comparison with rivals

“The group already expects to be grappling with lower demand even as life begins to return to normal,” one analyst said

Marks and Spencer Group PLC -

Marks and Spencer Group PLC’s (LON:MKS) full-year results gave analysts a hard time, as the retailer remains in the middle of a multi-year transformation and the effects of coronavirus cloud that perhaps more than its rivals.

Chief executive Steve Rowe said the results for the year to 31 March “seem like ancient history”. 

For the fourth quarter M&S reported a 2.6% decline in total group sales, with a 13.8% fall in like-for-like (LFL) sales for clothing and home and a 4.6% increase in food.

In the first six weeks of the new financial year, group sales are down 33%, with clothing LFL sales crashing 75% and food sales down 8.8%. 

“Both are on an improving trend,” said analysts at Peel Hunt.

The growth rate at the end of that seven-week period had moved into positive for food, house broker Shore Capital said, with online sales “strong” and clothing “improving” but still strongly negative.

Supermarket comparison 

For a basic comparison, the UK’s big four supermarkets have not-insignificant general merchandise businesses and most large stores include a substantial clothing selection.

M&S’s numbers came a day after Asda reported a 3.5% rise in like-for-like sales for that same three-month period, with the Walmart-owned chain also reporting a big decline in demand for fashion, general merchandise and fuel.

Sainsbury’s (LON:SBRY), which maybe offers a comparison in that it has a larger general merchandise business in Argos, last month reported 1.3% LFL growth for the three months to 7 March, so missing out the lockdown effect.

But Sainsbury’s said grocery sales were up 12% in the seven weeks to 25 April, with clothing sales down 53%, general merchandise up 9% for Argos and down 22% in supermarkets.

More food-focused Morrisons (LON:MRW) reported retail LFL up 5.1% for the 14 weeks from the start of February to 10 May.   

For a comparison with non-food retailers, high street clothing rival Next (LON:NXT) saw store sales fall 52% for the period from 26 January to 25 April, factoring zero store sales since 23 March, with online sales down 32% as there were virtually no website sales from late March to mid-April. 

Unsold stock

Like all fashion retailers, M&S has seen a growing ‘bulge’ of unsold stock for the spring and summer and need to plan for a forward pipeline of stock ordered for autumn and winter.

After finishing its financial year finished with stock worth roughly £500mln and committed forward orders of another £560mln scheduled to arrive in the following six months, the FTSE 250 said it was ‘hibernating’ some stock, cancelling some future orders and putting the rest on big discounts. 

A clothing offer focused on ‘essentials’, with adequate group liquidity seems and an improving food business, analysts at Liberum “should allow M&S to come out of the COVID-19 pandemic in a better shape than other apparel retailers”.

Analyst Sophie Lund-Yates at Hargreaves Lansdown said the decision to hibernate swathes of summer clothing stock is an alternative to lumping all the unsold items on sale rails and will be with the aim of preserving its already thin margins, with marketing spending for this part of the business also being reined in. 

“The group already expects to be grappling with lower demand even as life begins to return to normal,” she said.

'Never the same again'

M&S CEO Rowe said that the trauma of the Covid crisis has “galvanised” the company to secure the future of the business and step up its transformation, with £1bn of new cost cutting and cash savings this year, including from waiving the dividend until 2022.

The board has also launched a 'Never the Same Again' programme to “learn” and “capitalise on the opportunities to drive the transformation plan in a changed consumer environment”, including a cutting the size of its support centre, changes to leadership structures and negotiations with landlords on leases, buying from fewer suppliers, putting more of its IT system on the cloud and being more integrated online.

While coronavirus has undeniably accelerated the shift to online and the current crisis is giving an extra jolt to M&S’s system, Lund-Yates said it was disappointing that clothing sales have not picked up much online.

“If we’re to believe M&S has the firepower to meaningfully take part in the new digital age, improvement is still needed here. 

“Shareholders that have seen their dividends disappear will hope at least some of the saved cash will be going towards rapidly improving this side of the business.”

Liberum hailed management’s response to quickly and meaningfully address the structural long-term challenges of excess selling space, a limited online offer and range issues in Clothing and Home. 

With a spate of new senior management hires, including a chief strategy & transformation director in April, a new CFO in June and a new clothing and home director in July, among others, the Liberum analysts said the company “could potentially take this opportunity to make further significant strategy changes”. 

Noting that the current £1.6bn market cap includes the Ocado investment which was valued at £750m a year ago “and is now likely to be worth more given the accelerated consumer transition to online grocery delivery”, and believing the 50%-plus decline in the shares so far this year “more than reflects the risks that M&S Clothing and Home sales struggle for an elongated period”, Liberum restarted coverage of the company with a ‘buy’ rating.

Peel Hunt was less impressed, saying the shares “hold limited appeal to us at these levels”.

Quick facts: Marks and Spencer Group PLC

Price: 100.45 GBX

LSE:MKS
Market: LSE
Market Cap: £19.48 m
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