- Marks and Spencer is taking market share from other food retailers
- It is the number one clothing retailer in the UK by market share
Ian Lance, co-manager of funds including Temple Bar Investment Trust (TMPL), argues that the market is undervaluing retailer Marks and Spencer (MKS).
“If you have made it to the first line of this article, congratulations on having a contrarian streak. Because after many years of disappointment most other investors have written Marks and Spencer off. But we think that this is a mistake and that they haven’t noticed the enormous changes that have taken place at the company.
“Marks and Spencer should now be thought of as an enormously successful food retailer. Investors who claim that the various offers for Wm Morrison Supermarkets (MRW) undervalue the business should apply the same rationale to Marks and Spencer. Its food retail business has been transformed by its deal with Ocado (OCDO) and the latest Kantar data shows that it continues to take market share from other food retailers. If you apply Wm Morrison Supermarkets’ valuation to Marks and Spencer’s food retail business, it would be worth in excess of £3bn, with the Ocado stake worth another £1bn. Marks and Spencer’s value in the stock market is £4.5bn – £3bn market capitalisation plus £1.5bn of debt. So the market appears to be giving virtually no value to Marks and Spencer’s UK clothing and home business.
“Marks and Spencer is the number one clothing retailer in the UK by market share with 8.6 per cent, following by Next (NXT) with 7.5 per cent and Primark with 5.6 per cent. And in the all-important online space it has been growing faster than the market: during the pandemic, Marks and Spencer’s online clothing sales have grown by around 80 per cent versus 60 per cent for the wider market, so the company is taking a greater share.
“Marks and Spencer now has £1.1bn in online clothing sales versus Asos’s (ASC) £1.4bn. Asos is valued in the market at 1.3 times revenues, which would accord a value of, say, £1.5bn to Marks and Spencer’s online clothing business. And its international business is worth around £1bn. Add these together, and you get a fair value for Marks and Spencer’s s ex store-based clothing of £6.5bn.
“Given this huge undervaluation, one wonders if the unsuccessful bidders for Morrisons might eventually turn their attention to Marks and Spencer.”
