Merryn's Blog

Don't buy M&S – this retailer looks a better bet

High Street bellwether Marks & Spencer is selling us some 'good' news. Like-for-like sales for the quarter to 26 September fell a less-than-expected 0.5%. So is M&S and the rest of the high street getting back on track? Don't bank on it. And don't buy M&S shares. Here's another retailer to buy.

Whether we shop there or not, we always like to know how high street bellwether Marks & Spencer (LSE: MKS) is doing.

As you might expect, the last two years have been among the toughest in the firm's 125-year history. "Sales fell off a cliff in the wake of the global banking collapse", which "caught all retailers on the hop", says The Telegraph's James Hall. Last year's final dividend was slashed by a third, and this year's interim is expected to suffer the same fate.

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But new products, price cuts and promotions have been introduced to battle the downturn. And now the company's selling us some 'good' news. Like-for-like sales for the quarter to 26 September fell a less-than-expected 0.5%, and boss Sir Stuart Rose is "pleased to report continuing improvement in our performance - demonstrating the actions we're taking are working".

So is M&S and the rest of the high street getting back on track? Don't bank on it. 12-month comparisons are misleading because of last year's sales slump. The two-year view still looks bad.

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But more important, M&S customers are likely to stay cautious. Annualised consumer credit growth came in at just 0.7% in August, the lowest since records began in 1994. That's not good news for Sir Stuart. And worse still, a mixture of tax rises and increases in National Insurance contributions next year necessary to refill the state coffers - will keep consumption under the cosh.

With M&S shares already up almost 70% in 2009 and on a p/e of 14.5x - I'm not tempted.

If you're keen on buying a retail share right now, fast-growing online fashion store Asos (LSE: ASC) could be a better bet. Valued by the market at just £260m, it's small enough to pick up market share despite the overall economic woes. And despite reporting a 47% first-half sales gain, the shares are still the same price as a year ago.

On a forecast 15.4x p/e for next year, and with far more potential for growth than the traditional high street players, they could have more mileage.

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