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Can M&S [MKS] share price rise from the ashes of the UK high street?

Slow Christmas sales, falling profits and Brexit weighed heavily on the M&S [MKS] share price in 2018, but for the moment its relative stability amid a struggling UK high street is keeping the company above water. 

M&S is in fact on the up after a downbeat end to last year, despite reporting a drop in clothing and food sales over the Christmas period. The retailer surged more than 11% in the first two weeks of the year.Powered by CMC Markets, as at 15 January 2019

 

M&S reported that on a like-for-like basis, clothing sales declined by 2.4% and food sales by 2.1% in the 13 weeks to 29 December. While the results were far from ideal, many were simply relieved the retailer’s trading update didn’t come with a profit warning.

Steve Rowe, an M&S veteran who replaced outgoing chief executive Marc Bolland in 2016, stated that its full-year guidance would remain unchanged. 

While he pointed at reduced consumer confidence, mild weather, Black Friday and widespread discounting from competitors as a reason for a challenging period of trading, Rowe maintains that there are encouraging signs ahead. Improvements to its digital offering, a change in food pricing and an upcoming transformation plan are all set to keep the retailer competitive, according to the executive.

Analysts Shore Capital praised the performance against what remains a difficult retail market, where competitors such as Debenhams [DEB] saw like-for-like sales fall by as much as 5.7% in the weeks across the Christmas period. 

 

A radical transformation

M&S is far from being in the clear as it struggles to grapple with years of falling sales and revenue, most recently reporting £4.9bn in revenue in November, down from £5.1bn a year earlier. 

The food and clothing brand has repeatedly noted consumers’ shift to online services, leading it to embark on a “radical transformation”, which will include the closure of 100 stores across the UK by 2022.

The retailer’s upcoming transformation also includes a plan to reduce pricing in more than 100 of its lines and an overhaul of its online and digital strategy, although Rowe has admitted that there is much to do before seeing a significant change in this space.

“We’ve got to make sure our speed of sale gets better, our speed of distribution gets better, that we get more flexible around the online capability. That’s an important part of us becoming digital first,” he said.

It may be some time before shareholders see positive results, however, with Rowe stating that the company is “expecting little improvement in sales trajectory” in the short-term. 

“We’ve got to make sure our speed of sale gets better, our speed of distribution gets better, that we get more flexible around the online capability. That’s an important part of us becoming digital first” - M&S CEO, Steve Rowe

 

Short sellers circling

While M&S may have a long-term strategy, shareholders are growing impatient with its slow progress and falling consumer trust. The company is currently trading at some of the lowest levels since the wake of the great financial crisis in 2009. 

Shore Capital may have shown modest support for the company this July, but has also stated that “there is a lot more to do” and negative sales growth is “not a place where management wishes the business to be”.

As a result, 11.5% of its stock is out on loan with it racking up short sellers including Marshall Wace and the Pelham Long/Short Master Fund, Lone Pine Capital and BlackRock, according to Morningstar.

Elsewhere, Liberum Capital has maintained a “sell” rating with a 250p price target, saying M&S will continue to be squeezed by fast fashion and online businesses. 

 

Total UK revenue % change, Q3 like-for-like-2.2%
Market cap£4.48bn
PE Ratio (TTM)153.28
EPS (TTM)1.80

M&S stock vitals, Yahoo finance, as at 15 January 2019

 

Hargreaves Lansdown predicts a tough year ahead. “Until recently declining sales in the clothing and home division had been offset by strong performance from the M&S food business, but now that’s gone into reverse too. As well as traditional rivals like Tesco and Sainsbury, M&S Food is up against a new breed of online competitors such as Hello Fresh, Deliveroo and Just Eat,” said Laith Khalaf, a senior analyst with Hargreaves Lansdown.

“Although M&S is taking steps to fix these problems, there’s still a long road to recovery. The share price already reflects a weak and uncertain outlook for M&S, but investors still need strong nerves and a willingness to see things get worse before they get better,” said Khalaf.

One positive for shareholders is M&S’ dividend offering, which is currently at 7.5%, making it a dependable income stock. For the full-year to 31 March 2018, the business paid out £300m in dividends.

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