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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
-
Christmas at Chatsworth: review of The Cavendish Hotel at Baslow
MoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
By Dr Matthew Partridge Published
-
Tycoon Truong My Lan on death row over world’s biggest bank fraud
Property tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
By Jane Lewis Published
-
Business rates relief to be slashed – how to cut costs
Labour has promised to reform business rates, the corporate equivalent of council tax
By David Prosser Published
-
Should you invest in Trainline?
Ticket seller Trainline offers a useful service – and good prospects for investors
By Dr Matthew Partridge Published
-
Is Donald Trump's re-election a wake-up call for Europe?
Donald Trump will turbocharge the US economy – and expose Europe's weakness
By Matthew Lynn Published
-
Invest in Hilton Foods: a tasty UK food supplier
Hilton Foods is a keenly priced opportunity in an unglamorous sector
By Dr Matthew Partridge Published
-
Is HS2 back on the government's agenda?
The government is rethinking what to do about HS2 – Britain’s farcical train project.
By Emily Hohler Published
-
The Gulf states: a new competitor for the City's financial crown?
Bahrain and other Gulf states could eventually threaten London's financial dominance.
By Matthew Lynn Published
-
Is Labour on the brink of a crisis?
Labour's Autumn Budget is approaching – a fiscal and economic storm on the scale of 1976 looks likely, says Max King
By Max King Published
-
How will the UK gambling sector be hit by the Budget?
There are concerns for the UK gambling sector in the lead-up to the Autumn Budget. What could be on the cards?
By Dr Matthew Partridge Published