Marks & Spencer: Marc
Bolland has waited for a long time for some plaudits for his work at M&S,
so he must be a relieved man. The delights of the brown suede skirt, eh?
However, the question still remains as to how sustainable this new success is?
On food M&S seems to be about as good as Waitrose, with no pretence at
competing with the discounters. In clothing, the fashion element still seems to
be very patchy, with Next still leading the way overall whilst Primark increasingly
dominates the cheap end of the market. So, whilst these annual results to 28th
March 2015 have been well received, I am still doubtful as to whether this
retail juggernaut can build momentum.
At the topline sales were up 0.4% at £10.3bn, with underlying pre-tax
profits, after several years of decline, up 6.1% at £661.2m. As guided General
Merchandise gross margins grew smartly, by 190bps, making up for another poor LFL
sales figure. A glimmer of light here though, is that the final quarter did
show positive LFL sales. In food, gross margin was up 30bps, with just a smidge
of LFL sales growth. The international business had a tough year, with
operating profits down 24.8% to £92m, as sluggish European economies and various
currency headwinds whipped in. Capex was cut sharply to £526.6m, down £183m,
with free cash flow rising £96.3m to £524.2m. The full year dividend was 18p,
up 5.9%. The added excitement here was the news that, rather a la Next, M&S
wants to start annual capital returns, starting with a £150m share buy-back.
This sounds good, but is fairly modest compared to the £9.8bn market
capitalisation and fell short of many expectations. Still it is a start and a
signal of confidence.
Looking ahead the group is guiding for another 150bps-200bps of General
Merchandise gross margin uplift, with the ambition of some sales growth.
Another single digit bps improvement in food gross margins is cited, offset by
4% extra costs alongside 4.5% of new space (largely Simply Food), whilst capex
will be steady in the £500m-£550m range. So if the ship can hold a steady
course, then the lower level of capex should play its part in generating the extra
cash to hand back to shareholders. Consensus forecasts for FY2016 are for eps
of 35p, giving a PE of 16.9x at 592p (a price level last seen in late 2007). A
19p dividend would produce a yield of 3.2%, but a £150m buy back can be seen as
an additional 1.5%. The next year looks promising enough, so that M&S can
keep on this new track and maintain a more cheery share price. However, having
missed this year’s bull run in the stock, I would still be fretting about the Next/Primark/Waitrose
competitive threat and remain cautious. (Neil Cumming, 26th
May 2015)
These comments are not a personal
recommendation to deal. Any investments can fall as well as rise in value, so
you could get back less than you invest. I may have a financial interest in
some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower
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