Marks and Spencer (LSE: MKS) has reported a third year of underlying profit falls, with a 3.9% drop to £623m for the year ended 29 March — and that was despite a 2.7% rise in group sales to £10.3bn.
In morning trading, the share price fell 11.5p (2.5%) to 439.5p, resulting zero overall change over the past 12 months and a rise of just 10% over three years.
Clothing still weak
The problem, as usual, is clothing. Although like-for-like food sales grew by an impressive 4.2%, General Merchandise sales fell 1.4%. But chief executive Marc Bolland managed to put a positive spin on it, classifying the fall under “early signs of improvement“.
Speaking of “the scale of investment required to transform our business“, Mr Bolland said that the company is “making solid progress on this journey” — but it’s proving to be a longer journey than many of us had hoped three years ago, when M&S started to face up to its problems.
The news actually wasn’t that bad overall, with underlying earnings per share (EPS) up a modest 0.9% to 32.3p, and the dividend was maintained at 17p per share. That puts the shares on a trailing P/E of 13.6, which doesn’t seem outrageous compared to the FTSE’s long-term average of around 14, and the 17p payout represents a yield of an above-average 3.9%.
Competitors doing better
M&S talked of tough conditions in the clothing market, citing “high levels of promotional activity” as one reason behind the drop in sales — but that surely only suggests competitors are handling their promotions better?
M&S is up against giants like ASOS (LSE: ASC) these days. The online fashion retailer has seen sales and profits soaring over the past few years, although its share price is prone to booms and busts, and the shares are now valued at a forward P/E of a massive 65.4p — EPS would need nearly a five-fold rise to match M&S’s P/E ratio.
But the rag trade is one in which actual physical stores do still possess advantages — you can feel the width before you buy and can try stuff on, rather than ordering and just hoping for the best. For an example of how to do it well, just look at NEXT (LSE: NXT). While we fought our way through recession, NEXT shareholders enjoyed five straight years of double-digit earnings growth, and they have further growth forecast for the next two years.
But others in the business, like Debenhams (LSE: DEB), are also struggling. Debenhams has had a few years of mixed fortunes, and the City’s analysts are expecting a fall in EPS for the year to August of more than a quarter — and they reckon the dividend will be cut this year. Investor confidence is poor, with Debenhams shares down 17% over the past year to 79p.
Has-been?
Could it be that there are too many faceless sellers of anonymous clobber on our streets these days and M&S just can’t distinguish its merchandise? Well, I’ve certainly never heard anyone say “Ooh, that’s nice, is it M&S?” Nobody under 60, anyway.
I’m sure M&S will plod on for decades to come, with its reasonably-valued shares providing reasonable dividends — but we probably shouldn’t expect much more than that.