Well a year has passed since I wrote that: 'Sub 3 quid a share equates to a bottom drawer call option i.e. buy it at or below this level and I think you have a sporting chance to make some money over (say) the next two or three years. The transformation programme is absolutely the right thing to do and thinking big and radical is the key as it is a really competitive world out there. But it is a bottom drawer stock - only one to blend into your portfolio after you have a holding in those eight or ten much more compelling total return FTSE-100 stocks out there currently.' If I look at the Marks & Spencer (MKS) share price today, then this is all a massive work-in-progress and the company's assertion of 'good progress' remains somewhat optimistic...
The full year numbers are only of minor help with a 3% fall in revenues and a 10% fall in profit before tax (and adjusting items!) reflecting some of the challenges obvious to all out there, albeit worsened by some one-offs. Additionally, we all know about the dividend being cut (by 25% to 13.9p – a still useful c. 5.3% yield) to help fund the transformation (including the new Ocado link-up which is being funded by a rights issue over the next few weeks via a 1 for 5 issue at 185p). At least the quoted net debt has gone down aided by working capital initiatives, although it does have a pension deficit to fund too.
The conference call said all the right words which will give bulls sufficient reason to be excited...and bears similar confidence too. The Chair Archie Norman rambled about egg and spoon races - and having occasional wobbles - but they are giving it a good go, I give them that with the aforementioned Ocado link-up to help boost online/digital delivery and ongoing net store closures reflecting the need for a smaller estate. I do note though that the 'two or three years' I observed above has evolved in the company's words a little bit to 'deep in that three to five year plan of making M&S special again'. Classic bottom drawer stock slight pushing out of the timescale! But all the noises about pushing power down the line, being more responsive, creating a 'data lake' etc. all sound fine. It is just a question of doing it...and delivering on it. Trading was hardly rampant but not dire, and showing signs of improving. Food saw trading 'adjusted for Easter timing' showing a 1.5% like-for-like decline but exhibiting 'an improving trend in the second half of the year, and like-for-like revenue and volume growth in Q4'.
The forward key here is going to be the link-up with Ocado which - for me - is just the right sort of name M&S should be hooking up with. The Clothing side is behind the times in online too, but is slowly getting there, although was 'constrained by weak availability in Q4 as we sold out of fast selling lines and experienced supply issues'. That's a schoolboy error - but others including ASOS (ASC) recently have done this too. Guidance is still for a lack of revenue growth and margin movement either side of zero, albeit with considerable mix change below the headlines. So it is all still about change. Valuation (the numbers are naturally a touch opaque with the money raising impact) is a tad above a double digit EV/ebit multiple, which can clearly go one of two ways. It is all about whether you think it can sustain/build profits aided by the business changes (more online/digital, new ranges, evolved physical stores) or not. The importance of the Food division does give the company more of a defensive angle than a more typical established retailer, but this has been a lumbering giant and the challenge has been to try to turn the oil tanker. So plenty of debate still but if you put the gun to my head and ask me whether I would back or not back the rights issue, I would say 'back it'...and put your extra stock certificate(s) in the bottom drawer.
Filed under: M&S, Accesso, Roger Lawson, Woodford EIF, Stilo, Chris Rynning, Neill Ricketts
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