Marks & Spencer is an expert in false starts. The British high street stalwart has been stuck in a perpetual cycle of turnaround initiatives for years. Does a rare profit upgrade show that the latest shake-up will yield results?
The boost to pre-tax profit guidance for this year indicated that the latest reboot might have legs. M&S’s earnings read like a tug of war between its food and clothing-and-home businesses. Food sales might have provided a lift, but the latter has been an albatross.
But the severe impact of non-essential retail closures last March led to an acceleration in the overhaul of the store estate and improving online sales across the business.
In November, the FTSE 250 constituent announced the launch of its “MS2” division, with the lofty aim of competing with online pure-play clothing rivals. That includes faster delivery by expanding its Castle Donington fulfilment facility in Leicestershire, selling third-party labels in the hope of broadening the customer base, and testing demand for products online so it can repeat-buy those that sell well.
In three years’ time the target is to generate more than 40 per cent of clothing and home sales online. A 62 per cent rise in online clothing and home sales in the 19 weeks to August 14, versus the pre-pandemic level, bodes well, although there’s naturally the caveat that the lingering effects of Covid in pushing shoppers from stores to the website might still be skewing the picture.
But what about the other 60 per cent? A question mark hangs over whether it can revive in-store sales of its clothing and home ranges. The strategy is to focus on specific lines and reap supply chain benefits from buying fewer ranges in bulk. It has also switched its focus from formal wear to more casual clothing, which includes a new activewear range.
The much higher profit margins on clothing and home sales compared with food give added urgency to stem the slide here. Over the 14 weeks to mid-August, clothing and home store sales fell almost a fifth below the pre-pandemic level.
Square-footage that’s not bringing sales growth is a bigger drag when you consider the retailer’s large rent bill. Full line stores — those that sell food and non-food — accounted for 41 per cent of the £2.4 billion in lease liabilities at the start of April.
Rent liabilities here have shrunk and may reduce further as it plans to cut its full-line stores from 255 to 180, closing about 30 and turning 45 into food-only shops. Hard-up commercial landlords might be more willing to give more generous lease terms in the near-term, too.
Analysts have forecast 22 per cent growth in pre-tax profit next year, from £324 million for the current financial year.
Bets against Marks and Spencer have diminished; short interest in the stock stands at 2.85 per cent, against a June 2018 peak of just over 12 per cent, according to Castellain Capital.
At a forward enterprise value/ebitda (earnings before interest, taxes, depreciation, and amortisation) multiple of just under six, the shares, justifiably, trade at a substantial discount to those of Next, its more digitally advanced rival. But that also leaves the stock valued slightly below the average multiple achieved since Steve Rowe was appointed chief executive in April 2016, and at the bottom of its publicly-listed peers.
That’s despite progress on food sales and online clothes and home ambitions looking their most promising in recent years. Surely bidders will start circling soon. Only 40 per cent of M&S’s estate is either freehold or on very long leases, which would preclude a potential sale and leaseback of the scale afforded by Morrisons’ vast property holdings. But the group’s current valuation looks too inviting.
Advice Buy
Why Progress in food sales and online could forge a path back to profit growth
Blackrock World Mining Trust
An investment trust focused on global miners has proved the perfect recovery play over the past 18 months. Blackrock World Mining Trust’s share price has delivered a 123 per cent return relative to the FTSE 100 since the end of March last year, propelled by the boom in commodity prices.
Whether the pace of the rise continues is much less certain. The fortunes of it are in sync with the wax and wane of metal prices.
But for longer-term investors, the trust has delivered decent returns. There’s no official benchmark, which makes measuring performance less straightforward. The trust references consumer price inflation, the resource-heavy FTSE 100 and a more diversified version of the MSCI ACWI metals and mining index.
Over the first half of 2021 its share price total return outperformed all three, but more importantly, its cumulative performance has beaten the MSCI ACWI metals and mining index and the FTSE 100 over a past three and five-year basis. The discount in the share price against net asset value has narrowed to just over 2 per cent against a 35 per cent peak during the 2008 crash.
Environmental, social and governance concerns might spring to mind. It still has some exposure to thermal coal via Glencore, which accounted for 6 per cent of total assets. On the other side, it argues that investments in groups producing commodities like copper and battery-related materials will play a key role in decarbonisation efforts and building renewable energy systems.
The quarterly dividend has become a more important part of the investment case. For the first half of the year it declared an ordinary dividend of 10p a share and 20.3p for 2020, which gives it a dividend yield roughly north of 3.5 per cent.
Almost two thirds of the income paid was backed by dividends from its holdings, but the rest was from selling put and call options, fixed income investments and royalty income from mining production. The idea is to give shareholders a more consistent income.
Fluctuating commodities prices are always a risk but a sector-wide reduction in debt and miners so far not splurging on acquisitions or big projects is a good sign.
Advice Buy
Why Offers a good dividend at an attractive valuation
