I think it is fair to say that the Marks & Spencer (LSE: MKS) share price has been a pretty poor investment during the past five years. Including dividends to investors, the stock has underperformed the FTSE 100 by nearly 13% per annum since 2014, and its performance is just as bad over the past decade. Investors would have been better off just leaving their money in a low-interest savings account than owning the shares since 2009.
Unfortunately, it doesn’t seem as if this performance is going to come to an end any time soon. Today I’m going to explain why I believe the M&S share price could fall a further 30% from current levels.
Pressure building
Last week, the high street giant lost its fourth clothing chief in a decade as it struggles to turn round the business and attract younger customers. The revolving door to the clothing chief’s office is an excellent analogy of the group’s troubles over the past 10 years.
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M&S has trialled a stream of new turnaround plans since the financial crisis, but so far, nothing has worked. In May, M&S reported a 3.6% decline in clothing revenues compared to a 0.6% decline in its food business. It’s difficult to pinpoint where M&S has gone wrong, but customers of the 135-year-old retailer often complain that clothing quality and choice has deteriorated markedly since its heyday.
To try and offset the decline at its clothing business management is trying to grow out the group’s food business. To this end, M&S announced a joint venture with online retailer Ocado at the end of February, which will see the retailer team up with its younger peer in a home delivery initiative. M&S paid £750m for 50% of the Ocado joint-venture, which will begin trading in September 2020.
Management seems to think that this will cure the company’s ills, but I’m not convinced. Food retailing is a brutal business, margins are razor-thin, and competition is only increasing. Even the most significant players in the market, Tesco, Sainsbury’s and Asda are struggling to expand income in the current environment, and M&S’s food sales are already contracting.
In other words, I think this mega-deal could end up being an expensive mistake for the business.
Further declines
Of course, only time will tell if M&S’s tie-up with Ocado will help turn the business around. It could be a great success for the partnership. However, I am not willing to get involved with the M&S share price right now because I think it is too expensive.
City analysts believe earnings per share will fall by nearly 40% this year, that’s a considerable decline. There’s no guarantee earnings will recover soon either. In the best case, analysts believe earnings will increase just under 1.5% in fiscal 2021 which, considering the fact that profits have declined by more than a third over the past five years, seems optimistic.
With earnings declining and no sign of a turnaround on the horizon, I think there’s a high chance the stock will fall further from current levels. Another 30% decline in earnings over the next five years could see the shares down another 30% (and possibly further if the Ocado venture does not work out) from current levels, excluding dividends. A P/E of 10.4 does not compensate for this risk in my view.
That’s why I’m staying away from the company.
