Are Marks and Spencer (MKS) shares finally worth buying?

The Marks and Spencer (LSE: MKS) share price was on the front foot this morning, despite the company reporting a huge loss as a result of the coronavirus pandemic. Should investors like me take this as a sign that all the pain is priced in and the shares are finally worth buying?

Big loss

Sure, today’s full-year numbers were never going to be pretty. The closure of high streets and multiple UK lockdowns would never be good news for the 137-year-old, former FTSE 100 firm.

Group revenue came in at just under £9bn for the 52 weeks to 27 March. This was 12% lower than in the previous financial year. MKS’s food sales continued to offset poor performance elsewhere with like-for-like revenue rising 1.3%, supported by its deal with online grocer Ocado. In contrast, revenue from its Clothing & Home ranges plummeted 31.5%.

It gets worse. Profit before tax and one-off costs fell to just £41.6m. That’s a 90% fall from the £403.1m achieved in the previous year. Once those costs are factored in, a pre-tax loss of £201.2m was reported, down from the £67.2m profit achieved in the previous year.  

Contrarian play?

The fact that the MKS share price is rising today can’t make up for the fact that the firm, from an investment perspective, has long been a losing bet, I feel. Over the last five years, its stock has more than halved in value. By contrast, the FTSE 250 that Marks features in is up 31%. In other words, investors could have achieved a far better return by buying a simple exchange-traded fund that tracks the index. But could now be the time to buy?

There are a few reasons to be hopeful. In addition to the reopening of high streets, CEO Steve Rowe’s strategy to transform the company (the Never the Same Again programme) appears to be gathering pace. The deal with Ocado is bearing fruit with M&S products now making up over 25% of Ocado’s average basket. The firm also reported growth of 53.9% in online clothing and home revenue today, helping to justify the decision to close underperforming physical stores. 

However, there are still things that would make me wary as a potential investor. 

Buyer beware

After so many false starts, I remain sceptical that Marks can succeed in attracting shoppers back to its stores. Talk of building “a trajectory for future growth” and making the company “special again” sounds great. However, we’ve been here before. The retailer needs to find and retain a lot of new customers. That’s a big ask.

There are other things I don’t like. Net debt still stands at just over £3.5bn including lease liabilities. Forget having a “strong liquidity position” — why buy M&S when there are online-only operators boasting massive financial war chests and no physical stores to maintain? Elsewhere, operating margins have been woeful for years, as have the returns on capital invested.

In addition to all this, MKS isn’t currently paying dividends. As such, shareholders aren’t being compensated for their patience. To me, this makes the opportunity cost of not investing elsewhere very high.

Bottom line

Today’s share price suggests that a lot of the pain is priced in and that MKS shares might finally worth buying. With so many better options available in the market, however, I’d wait to see signs of real progress before considering adding the shares to my portfolio.