The stock market hates surprises. So when Marks and Spencer Group (LSE: MKS) delivered annual results that were in line with expectations this morning, its share price rose by as much as 6%.
Of course, this upbeat reaction doesn’t mean that the company has solved all of its problems. Although group revenue was broadly unchanged at £10,698.2m last year, like-for-like sales fell by 0.3% in Food, and by 1.9% in Clothing & Home. Â
That’s a pretty poor performance in my view. It suggests to me that the retailer’s clothing offering is still struggling, while the Food business has lost the upmarket edge it used to have over standard supermarkets. That’s my experience when shopping in M&S Food too.
Lower sales and higher costs pushed the group’s operating profit margin down from 6.5% to 6.3%. This may not seem a big fall, but it was enough to cut adjusted pre-tax profit by 5.4% to £580.9m. Adjusted after-tax earnings fell by 8.6% to 27.8p per share, exactly in line with broker consensus forecasts.
Luckily for shareholders, the dividend was held at 18.7p, giving the stock a tempting 6.1% yield.
Not a pretty picture
Investors who have backed a turnaround at M&S have had a frustrating time so far. The group’s share price has fallen by more than 20% over the last year, and is almost 50% below its 2015 high of 594p.
I’m also disappointed by the continual use of adjusting items to boost profits. Exceptional costs rose to £514.1m last year, up from £437.4m in 2016/17 and £200.8m in 2015/16. Including these costs in profits reduces last year’s pre-tax profit to just £66.8m.
Admittedly, some of last year’s exceptional costs relate to one-off store closures. But repeated costs relating to IT, logistics and organisational changes suggest to me that chief executive Steve Rowe is playing catch-up after years of under-investment in routine parts of the business. This may have boosted the group’s adjusted profits in the past, but it’s coming at a price now.
Things may be about to change
M&S management has now accepted that it needs to shift more decisively towards online sales. The group’s store closure target has been increased from 60 to “over 100” after finding that “an encouraging number of customers” move to nearby stores when their local store closes. Improvements to the retailer’s website and warehousing facilities are planned to provide a faster and more responsive service.
With turnaround specialist Archie Norman in the chairman’s office, the company may finally manage to find a way of regaining its identity. But it’s not going to be a quick process. Mr Rowe said today that he hopes to deliver “profitable growth in three to five years”.
An income buy?
I’m tempted to give the firm the benefit of the doubt. Today’s accounts show that net debt fell by 5.5% to £1.83bn last year. And cash generation remained reasonably strong.
Although analysts’ forecasts suggest that earnings will fall by another 3% in 2018/19, the decision to hold the dividend suggests to me that the board believes this payout should be sustainable.
On that basis, you can buy the shares today on 11.2 times forecast earnings and with a 6.1% yield. I believe this could be a good long-term income buy.