Almost as embarrassing to admit that I spent six hours of time gawping at the BBC's American election coverage the other night (I did eventually switch to a financial TV channel), is that the smallest position in my SIPP is Marks & Spencer (MKS) upon which I am currently sitting on a stonking loss (i.e. a small starter position has got even smaller). They cannot all be Barrick Gold (NYSE – GOLD) or GVC Holdings (GVC) I guess. Unsurprisingly, the world of pandemic and structural online shifts has not been kind to M&S, as the company's lacklustre product range has been also shown up to be insufficiently online. The joint venture with Ocado (OCDO) - which went live on the 1st September - was an expensive but pretty smart (in my view) hook up...
Ocado (as I rhapsodised here a few days ago) is an oh-so-smart company (at a gargantuan valuation) and the M&S food delivery underlying demand will give it a much bigger playbook than it had with Waitrose previously. So all potentially workable there and - as befits a food business - sales rose a tad even after adjusting for troubles in the hospitality sector during the first half period on which numbers have been released. It was not epic and for all the potential expansion via Ocado, the M&S food offering is potentially subject to downtrading. There is a reason why I very rarely shop there after all. As I have noted before, I bet M&S wishes it could split out the food business from the monolithic two and three storey High Street and shopping centre locations. But as a dual food-clothing/home retailer it cannot. And it is the latter area which remains completely shocking, with over a 40% sales dump during the first half (thanks lockdown!) and a desperately questionable strategy around remaining attractive and/or relevant to the average contemporary consumer especially as another lockdown period looms. Yes, the company is embracing online more ('Sparks loyalty programme...over 1.5m app downloads') and even can now claim that it is the '#2 online clothing retailer', but it is slogging up a hill with a boulder on its back. So we are a tad advanced from a few months ago (mostly the Ocado jv going live) but the heart of the issue remains unchanged: does M&S have a viable and valid future shareholders can believe in?
If you run the numbers you can see the basic problem. A market cap of £1.9 billion is supplemented by £3.9 billion of net debt and operationally (before a bunch of special adjustments and the like) the business generated a first half loss thanks to the home/clothing side. It was not a disastrous loss and a squeeze on costs, leases and cashflow did at least allow the net debt line to compress a little (although clearly this metric is still too big however). M&S might talk the 'Never The Same Again' story, but as a company it remains in call option territory. It might used to have been even quite recently a £300m+ operating profit and a £200m+ free cash flow generation company, but that is not the business this year and, blurred by ongoing challenges and changes, quite possibly not next year too. There is - under the chairmanship of the legendary Archie Norman - however some proper change going on (despite the unsurprising high levels of scepticism) and the food retailer business as a standalone would cover much of today's EV. But extracting that value is super difficult with a legacy property book and an overtly struggling clothing/home business, even with recent online shifts and pretty aggressive store portfolio rationalisation.
If you channel your inner Zak Mir and look at the chart, then you could say the share is starting to maybe exhibit a bottoming share price chart, with a near-term regaining of the one quid level undoubtedly important psychologically. But it is leveraged within itself and to the world as well as its own turnaround. Widows and orphans may shop there but I am not sure they should be buying the shares. That's why I call it the thick end of a quid's worth of call options. In terms of the options for my puny position of quadruple, quits or sit on my hands for the time being...I choose the latter. More about the Christmas sales numbers.
Filed under: M&S, Trainline, Clare Gilmartin, Superdry, Pathfinder Minerals, TheWorks, Sainsbury
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