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

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.

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.

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.