M&S’s bombed out shares deserve better

published 31 October 2005

The British "love kicking their national icons", says Richard Wachman in The Observer. Small wonder, then, that shares of Marks & Spencer have "bombed" this year as critics have insisted that the rebound from the profit collapse under former chairman Richard Greenbury is losing momentum. The recent news that clothing sales have now been flat for three successive quarters has intensified the clamour. But the worries look overdone. Its rivals aren't doing any better: Next's 0.8% rise in like-for-like sales in the six weeks since August, for instance, "is hardly brilliant", and Debenhams' shares owe their strong performance to a bid battle. Note, too, that M&S's "creative team has never looked stronger".

Earnings growth in the clothing division also looks healthy, says Investors Chronicle. Margins rose by 1.6% in the first half thanks to "better buying" and reduced distribution costs, and should climb further in the second half. In any case, clothing comprises just 50% of group sales, and in the areas that make up the remainder - food, furniture and gifts - M&S "has made huge strides" to underpin future growth.

On the food front, sales rose by 7% in the first half as the initial 29 "Simply Food" stores have proved "a great success". Another 125 stores set to be opened by 2006 should add an annual 5% of growth to food sales. M&S also has "a great opportunity" to expand its customer base with its stand-alone furniture and homeware stores - it currently has just 2% of this £20bn a year market - the first of which will be launched in February. The third element of the group's strategy is the new credit card, which has reeled in 2.6 million customers in a month. Start-up costs are high - break-even is only expected in 2005 - but the marketing opportunities are "fantastic" and running costs should be lower than that of rivals as M&S customers typically run up few bad debts. The shares, on just 12 times forecast earnings, "have fallen too far" given the opportunities. They should also hold up better than big-ticket retailers if conditions on the high-street deteriorate. A prospective yield of 4.2% is also enticing.