As Archie Norman unveiled yet another turnaround plan for Marks & Spencer, the chairman surveyed sceptical analysts and journalists in front of him and quipped that the retailer’s middle name was “False Dawn”.
More than two years later, his remarks appear prescient: M&S’s shares have more than halved to 134p, its dividend has been canned and the pandemic has tipped the faded high street giant into the red for the first time in its 94 years as a plc.
Not everybody, though, has abandoned hope on the latest attempt to revive the retailer that brought us chicken kievs and packaged sandwiches. The Analyst, a well-regarded City research house known for its timely “sell” calls on Wirecard and Carillion, this month urged its clients to buy M&S shares.
The main attraction (other than a bombed-out share price) is M&S’s timely jump into online food through last year’s £750m acquisition of a 50% stake in Ocado’s retail business, which grew sales by 35% last quarter as shoppers shunned supermarkets because of Covid-19.
M&S’s market value of £2.6bn implies that the City has, understandably, given up on its perennially underperforming clothing business, where the virus has turned steady decline into something resembling freefall. Shore Capital, house broker to M&S, has forecast that like-for-like sales over the peak festive trading period will be down 28% on last year.
M&S’s interest in acquiring Jaeger, Victoria’s Secret and even parts of Sir Philip Green’s collapsed Arcadia Group empire show it is finally accepting it cannot stop the rot without some bold action.
Declining clothing sales are made all the more painful by M&S’s long, inflexible leases, which add up to a £2.5bn liability that will not ease significantly until a tranche of sale and leaseback agreements expires in 2026.
Although M&S still throws off enough cash to fund the liabilities, its older, asbestos-ridden stores are in the forefront of investors’ minds. That could encourage Norman, 66, to shore up the balance sheet with a sale of the rest of its international business or even revive a much-discussed plan to spin off the clothing business.
Critics of the M&S/Ocado tie-up point to the dismal margins in selling food online and argue that the complex technology means it cannot scale up quickly enough to meet surging demand, which is being mopped up by supermarket chains.
Despite its drawbacks, the venture gives Norman a real growth story to sell for the first time in years. And with the shares having taken a battering, potential rewards outweigh the risks. Buy.
