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Marks & Spencer held back by clothing and home

The food business performed well in the first half, but management revised down margin expectations for clothing and home
November 6, 2019

The Marks and Spencer (MKS) results broadcast began with an admission: management had originally intended to title the results “transformation beginning to bear fruit”, until the supermarket’s non-executive directors responded “not that much fruit”. In the event, it went with the suitably airier: “far reaching change – delivered at pace”.

IC TIP: Sell at 187p

We can see both perspectives. On the one hand, it would hardly be the first time the group had touted its revitalisation – the title of its 2018 full-year presentation was “transformation underway” – while challenges remain in plain view. Adjusted pre-tax profits were down 17 per cent to £177m, for example, despite the burden of adjusting items coming in more than £89m lighter than last year. 

However, it would be glib to ignore the real progress management has made. The food division, which accounts for 59 per cent of revenues and just shy of half of UK gross profits, increased like-for-like sales by 0.9 per cent, with accelerating growth in the three months to 28 September. 

Management has been reducing prices on staples such as milk and chicken, while cutting promotional activity in half. It now expects the division’s sales to be broadly flat for the full year, versus a 1 per cent decline previously. Gross margins are expected to stay within 25 basis points above or below the current 31 per cent level, although that metric did slip 20 basis points during the first half.

A store closure programme has also been under way – catch-up, management says, for a lack of churn in the estate in previous years – and the result has been to push sales in the clothing and home division down 7.8 per cent in the period. The closures are not going to let up, either – sales for the division are expected to end the year down by 2-3 per cent, while the group now expects gross margins to fall 25-75 basis points, versus previous expectations of 25 basis points above or below the current level.

House broker Shore Capital is forecasting adjusted pre-tax profits of £481m, giving EPS of 19.5p for the full year, rising to £501m and 20p, respectively, in 2021. 

MARKS AND SPENCER (MKS)  
ORD PRICE:187pMARKET VALUE:£3.65bn
TOUCH:186.8-187.2p12-MONTH HIGH:301pLOW: 161p
DIVIDEND YIELD:6%PE RATIO:40
NET ASSET VALUE: 160pNET DEBT:51%
26 weeks to 28 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2018 (restated)4.971013.506.5
20194.861546.103.9
% change-2+52+74-40
Ex-div:14 Nov   
Payment:10 Jan