October was threatening to be another month of pain for Marks & Spencer (LSE: MKS). After starting out in the FTSE 250 following its demotion from the Footsie, the retailer’s share price kept on plunging and even closed at its cheapest for three decades earlier this week.
What a difference a few days makes, though. Following news of a possible Brexit breakthrough, and British and European Union negotiators now entering ‘the tunnel’ – the period of intense negotiation to find a deal before the 31 October deadline – M&S saw its share price spike 10% on Friday amid hopes that the UK might avoid an economically destructive Brexit.
Hold your horses
This is great news, of course. But it does come with one or two critical caveats for M&S.
Firstly, as I’ve already described in recent days, market makers shouldn’t be overly confident that a deal is about to be signed off. What might be good for the gang of 27 European Union members on the mainland might not be acceptable to the 650 members of Parliament who will have to sign off on any deal as well.
Secondly, the challenging retail conditions in the UK are likely to persist for some time yet as it’s unlikely that shoppers will suddenly break open their chequebooks and start spending like there’s no tomorrow. There still remains some serious uncertainty over what the trading landscape for the UK will look like post-Brexit.
And thirdly, even if the long-term retail outlook improves in the event of a no-deal Brexit being avoided, M&S still has a mountain to climb to convince shoppers to come flocking through its doors again. Its fashions are frumpy, its stores stale, and its products overpriced. No wonder the likes of Zara and H&M, Primark and Next, continue to run rings around it.
Cheap but cheerless
What’s more, the sacking of clothing boss Jill McDonald in the summer has likely pushed back the chances of a recovery across its core lines even further. Not that a miraculous resurrection was looking on the cards, however – there’s been plenty more musical chairs going on in the past five years at the top of the fashion division and yet general merchandise sales have still shrunk by around 15% in that time.
It’s not just that Marks & Spencer’s troubles are confined to its clothes and homeware lines, either. Sales at its food division are also sliding, too (down 0.6% on a like-for-like basis in the fiscal year ending March 2019).
And as I recently commented in a piece about Tesco, the march of the German discounters – firms that have pulled their tanks firmly onto the lawns of the likes of M&S by investing heavily in their own-brand premium lines – has meant that trading conditions are likely to remain über-challenging in this particular retail segment, too.
City analysts expect earnings at M&S to crash a further 23% in fiscal 2020 and it’s impossible to see how the board will turn the ship around any time soon. This is why I’m happy to avoid it despite its low valuation (a forward price-to-earnings ratio of 9.6 times) and its bulging 6% corresponding dividend yield. I reckon investment here could end up costing stock pickers a fortune.
