Russ Mould, investment director at AJ Bell:
“After a difficult first six months in charge, when his tenure saw the worst share price performance under any of M&S’ last six chief executives, Rowe has begun to put his stamp on both the firm and the shares alike.
“After a strong run, the shares are now down just 3% during his tenure and they are on a roll.
M&S share price performance during
First 6 months
Term of office*
Source: Thomson Reuters Datastream. *Steve Rowe term of office to 23 May 2017.
“The sudden surge from 337p on 2 April to just short of 400p now may have as much to do with the rally in the pound recovery as it does factors specific to M&S, but a stronger pound eases some cost pressures and inflation, boosting consumers’ spending power.
“Rowe, as he prepares to work with new chairman Archie Norman and new head of clothing, home and beauty Jill Macdonald, will gladly accept help from this tailwind as the new team looks to build upon the changes and progress made during the first 12 months of the post-Bolland regime, from which investors can draw five positives:
Full-price sales at Clothing & Home in the UK (the benchmark by which Next is judged and judges itself) rose 2.7% in the year as M&S weaned itself off the drug of excessive promotions to drive volumes, refined its ranges and improved availability of key product lines. The net result of all of this was a better-than-expected 105 basis point improvement in gross margin at the Clothing & Home operation.
Retrenchment overseas led to improved earnings from the international businesses, on an underlying basis.
The underperforming M&S.com website began to show better traction, as sales growth reached 9.4% year-on-year in Q3 and 7.6% in Q4, after a broadly flat first half, as M&S removed prior keynote “cyber events” and relied less on promotional activity.
The ongoing expansion of the Food business generated total sales growth of 4.2% for the year, while the 2.1% drop in Q4 (as well as the fresh decline at Clothing & Home) can be at least partly explained by the timing of Easter.
The full-year results were marginally better than expected, as underlying pre-tax profit reached £614 million against the consensus forecast of £593 million, while the dividend was left unchanged at 18.7p – enough for a 4.7% yield.
However, there is work to be done if the sceptics are to be won over and the shares make sustainable progress beyond the 400p mark – the very figure, lest it be forgotten, that Sir Philip Green offered way back in 2004 in an unsuccessful takeover bid.
Today’s numbers still raise five key questions:
Even allowing for the vagaries of Easter the year ended on a dull note, as Clothing & Home offered its 20th like-for-like drop in sales in the last 24 quarters (which shows the unit is showing weak sales even against a base that keeps grinding lower).
The profit and loss account was marred by £437 million in one-off items, after £201 million of such supposedly “one-off” costs in 2016. While adding to the reprehensible trend of companies treating as many (negative) items as they can as one-off (surely it is management’s job to manage costs at all times, not just do it in occasional purges?) it also reveals the scale of the task which faces the new management team as they try to return M&S to the glory days of the £1 billion profit achieved under Sir Stuart Rose in 2007-08, just before the financial crisis struck.
While the emphasis upon the Food business is understandable, as Rowe looks to add 7% to floor space here while shrinking Clothing & Home by 1-2%, it does beg the question of just how much food do company executives think people can eat in any given day? The Food retail business is already a brutal dogfight and it seems unlikely that Waitrose, Co-op, Sainsbury and other rivals are going to calmly let M&S take market share.
The guidance for a change in gross margins of +0.25% to -0.25% in Clothing & Home and 0% to -0.50% in Food shows that M&S still faces cost pressures from the pound, the Living Wages and other factors, which place even great importance on the ability to hold price in what remain competitive markets. For all of the progress made analysts expected M&S’ (underlying) pre-tax profits to come in broadly flat for the next two years at around the £600 million mark.