Marks & Spencer, Tesco and Morrisons: a rotten day for retailers

Marks & Spencer: still struggling

Marks & Spencer (LSE: MKS) is still struggling with its clothing business. We learned today that the retailer had a terrible October. Although things improved a little in December, that was probably due to price-cutting.

M&S wasn’t the only retailer to disappoint investors today. Morrisons (LSE: MRW) issued a profits warning, while Tesco (LSE: TSCO) revealed that its pre-Christmas performance was mixed at best.

Let’s look at the three retailers in a bit more detail.

M&S – still limping behind Next

Perhaps the most surprising piece of news on Marks & Spencer today is that the share price has gone up. I guess some investors were impressed by the good news on food sales – like-for-like food sales rose 1.6% in the quarter. The online performance was also pretty good – sales rose by 23%.

But there’s no way that I’d buy the shares at the current price of 459p. That’s because M&S still hasn’t sorted out its longstanding problem with womenswear. Chief executive Marc Bolland had hoped that the latest autumn/winter collection would trigger a turnaround, but there’s little sign that’s happened.

In fact, we’ve just seen the tenth quarter in a row of declining clothes sales at M&S. Sales only hit a reasonably decent level thanks to last minute price-cutting. And slashing prices in the run-up to Christmas is a dangerous game only played by desperate retailers.

Yes, it can deliver a short-term boost in sales, but it damages your long-term relationship with customers. They’ll be more reluctant to buy next November at full-price, because they’ll expect M&S to cut prices in December.

Next, by contrast, only ever cuts prices after Christmas.

As Bryan Roberts at Kantar told Bloomberg: “This has left everyone wondering when the big turnaround is going to materialise. There was a lot of fanfare over the autumn/winter range which obviously hasn’t resonated with the public.”


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A shocker for Morrisons

Meanwhile, Morrisons’ Christmas performance was pretty shocking. Like-for-like sales slumped 5.6%, and profits will now be lower than the market had expected.

Morrisons is being hit hard by the rise of Aldi and Lidl, and it’s missing out on lots of online sales thanks to being a pure ‘bricks and mortar’ retailer. In fairness, Morrisons will start selling food online this year, but I suspect it’s going to be a long struggle to catch up with the likes of Tesco and Sainsbury online, and profitability will be even further away.

Unlike M&S, Morrisons’ share price has behaved more logically today and fallen by around 10%. That puts the company on a price/earnings ratio of just ten, but I’m still not tempted to buy. Things may well get worse before a recovery eventually comes.

(Admittedly, this is one of those relatively rare occasions where the MoneyWeek team fails to see eye-to-eye – my colleague Phil Oakley reckons Morrisons is worth a punt for the patient, based on its potential as a takeover target. He makes the case in this week’s issue of MoneyWeek magazine, out tomorrow – if you’re not already a subscriber, get your first three issues free here).

And the pain continues at Tesco

Tesco also reported a fall in like-for-like sales – down 2.4% in the UK in the six weeks before Christmas. That fall was even worse than analysts had expected.

Tesco could at least point to a 14% rise in online sales. It also claimed that its newly-refurbished stores were performing better than the rest of its shops.

The big challenge now for Tesco is to figure out what to do with its large out-of-town hypermarkets. Thanks to the rise of online shopping, these stores are in danger of becoming white elephants.

Tesco is trying to deal with this problem by turning the hypermarkets into ‘shopping destinations’ with restaurants, yoga classes and more. That sounds like a sensible strategy, but until we get more evidence that it’s actually working, I wouldn’t want to invest.

And let’s not forget that the rise of Aldi and Lidl is also a serious threat at the bottom end of Tesco’s range, while Tesco is being squeezed at the top by Waitrose and M&S. Morrisons has almost exactly the same problem.

Why I’m feeling a little bit smug

I confess I’m feeling a little smug today. Back in October I was pretty unenthusiastic about all three of today’s retailers, and I also said that Next was ‘my favourite retailer’. Unlike Tesco, Morrisons and M&S, Next has had a great Christmas – so I’m very happy to hang onto my shares.

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