Marks & Spencer Group’s (LSE: MKS) share price has been sliding for around three years, and now the stock trades 50% or so below its May 2015 level. Over that period, earnings and operating cash flow have been generally falling and the valuation has compressed to match reduced investor expectations.
The largely bricks-and-mortar-based retailer is leaning far forward into headwinds that ravage the sector. The onslaught from internet and discount retailers is relentless. They are disrupting the traditional high-street retailing businesses that many of us are used to – make no mistake about that.
Disappearing retailers
Names such as Woolworths and BHS (in its high street form) are long gone. Others, such as Debenhams, appear to be teetering on the brink. But what will become of good old M&S? The company has been struggling for years, never quite managing to pick up the mojo it once clasped so firmly. One good indicator of a firm’s performance and its outlook is to examine the directors’ decisions surrounding the dividend. It’s not good news. The dividend is more-or-less stuck in the mud with City analysts predicting the 2020 payment to be hardly any bigger than the 2015 one.
In the long run, my guess is that we won’t see M&S go bust because it has such a trusted reputation and brand image to exploit, but what we are likely to see is a managed decline and shrinking of the business. If the firm could change to embrace the new world order in retailing, surely it would have done so in a meaningful way by now. I’m sure there will be mini-recoveries along the way, but I reckon the long-term operational and share-price trend is down, and that’s not a good basis for an investment, so I’m looking at N Brown Group (LSE: BWNG) instead.
Moving with the times
I like the way the fashion retailer, which targets the plus-size and more mature customer markets, has migrated its sales from catalogue shopping over to internet shopping during the last few years. The company is moving with the times, and today’s full-year results reveal that 73% of orders arrive via the firm’s websites, with 76% of all traffic originating from mobile devices. N Brown is plugged into the modern world.
Yet the trading backdrop has been “challenging.” Nevertheless, the company managed to grow its revenue 3.9% compared to the year before and adjusted earnings per share moved 4% higher. The directors held the full-year dividend flat, signalling a cautious outlook. City analysts following the firm expect earnings to decline 1% for the year to February 2019 and to rise 4% the year after that.
N Brown earns its profits both from product retailing and from providing credit for customers to finance their new goods. The year saw “strong performance” in its financial services operation, driven by “continued improvement in the quality of the loan book, together with a reduction in arrears as a result of minimum payment changes.”
Meanwhile, it’s hard to make a case for the shares being expensive. Today’s 205p puts the forward P/E ratio for the trading year to February 2020 at just below nine, and the forward dividend yield runs a little over seven. My guess is that N Brown will emerge as one of the retail winners over the years to come.