M&S recovery has momentum: will it stick?
After years of decline, M&S seems to have turned a corner. But is this just a “dead cat bounce”?
For years, the retailer Marks & Spencer (M&S) was a byword for poor performance. Unfashionable clothes and lack of investment in stores, along with the general decline of the high street in the face of online shopping, are just some of the reasons put forward to explain the fact that its share price peaked back in 2007. A succession of leaders have tried to reboot the company, but until recently their efforts failed to stop its decline, as shown by the fact that its share price fell by roughly 80% between May 2015 and October 2022.
However, over the past two years, the shares have staged a comeback, more than tripling from a low of below 94p to 339p now. So has the business finally turned the corner, or is this just a “dead cat bounce”?
What's behind the M&S turnaround?
Some of the recent improvement is down to factors beyond M&S’s control. Like other retailers, it initially benefited from the end of the pandemic and the return of consumers to the high street. Problems with rival Waitrose have also led some shoppers to switch to M&S for food. Meanwhile, the recent cost-of-living crisis has seen many clothes buyers focus on affordable quality at the expense of high fashion.
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However, it’s hard to dispute that M&S deserves credit for embracing online sales, which now account for nearly a third of revenue. The company has also cut costs by boosting efficiencies, especially in logistics. It has closed down tired and poorly performing stores in favour of newer, more modern stores in better locations. Just two years into a long-term reorganisation, the potential gains are far from exhausted. At the same time, the closure of several well-known rival brands on the high street, as well as the continued expansion of its online businesses, should also help.
Overall, M&S has seen sales grow by just under 50% over the past three years, with its profits expanding fivefold during the same period. Sales are expected to keep growing over the next few years. Another sign that it has turned the corner is the decision at the end of last year to resume paying the dividend that it stopped during the pandemic. Operating margins have also gone up and it is achieving a double-digit return on capital employed. Despite this, the shares trade at only 12 times forecast 2026 earnings – the same valuation as Tesco and Sainsbury’s, both of which have been less successful recently.
As well as the strong prospects and cheap valuation, M&S’s share price continues to exhibit positive momentum. It is currently trading above its 50-day and 200-day moving averages, and has been the third best-performing share in the FTSE 100 (including dividends) over the past six months, only slightly behind Darktrace and Hargreaves Lansdown, which have been taken over. I would therefore suggest going long at the current price of 339p at £14 per 1p, with a stop loss of 269p. This would give you a total potential downside of £980.
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