Russ Mould, investment director at AJ Bell, comments:
“The feel-good factor created by what were frankly still pretty spotty full-year results back in May is wearing off just as quickly, judging by the cool reception given to Marks & Spencer’s first-quarter sales update.
“Investors will be particularly disappointed to see sales at Clothing & Home drop yet again, this time by 1.2% on a like-for-like basis, especially as the division received a 0.6% boost from a late Easter and the base for comparison was incredibly low:
Clothing & Home, like-for-like sales growth (%, year-on-year)
Source: Company accounts
“At least some solace can be taken from improvement in full-price sales and a lesser reliance on discounting to shift stock, which should help margins (where M&S has suggested gross returns on sales could rise or fall by around a quarter of one percent this year).
“However, Food failed to grow too, sliding by 0.1% on a like-for-like basis despite a 0.7% boost from Easter, to perhaps explain why boss Steve Rowe is treading carefully when it comes to his plan to transition floor space away from Clothing & Home towards Food.
“After all, the grocery business remains brutally competitive, a weaker pound will not be helping when it comes to cost and margin pressures and presumably the British public can only eat so much in a given day, week or month, regardless of who is selling it.
“The trade-off between weaker sales and higher margins may stop analysts from cutting their earnings forecasts but today’s numbers will not encourage them to raise their estimates either.
“The consensus is currently for roughly flat profits this year and next, a trend which leaves the stock lacking a catalyst for performance, despite the turnaround plan implemented by Steve Rowe after he took the reins last year.
“The 5.6% dividend yield should offer some support too and although earnings cover is lower than ideal at 1.5 times (based on forward earnings estimates) operating free cash flow cover is better at 2.5 times (based on historic figures), the balance sheet is not stretched and (unlike Debenhams) there are no onerous long-term leases and the pension deficit is not too much of a burden as yet.
“As a result, M&S offers some margin of safety to dividend-hunters although it would be unwise of investors to be too complacent as an unexpected recession could put M&S’ profits and cash flow under additional pressure.”
Source: Company accounts, based on 2016-17 numbers for balance sheet and cash flow figures
Marks & Spencer (£ million)
Interest income on cash
Depreciation and amortisation
Interest payments on debt
Key expenditure items
Source: Company accounts, based on 2016-17 numbers