The Marks and Spencer Group (LSE: MKS) share price is down by 8% as I write after the retailer issued a set of results showing its turnaround is still very much a work in progress.
Investors may also be reacting to news that the £600m share issue needed to help fund its deal with online retailer Ocado has been priced at a fairly big discount. Here, I’ll explain what this means and give my view on this high street stalwart.
“Green shoots”
Chief executive Steve Rowe took on a tough gig when he accepted the top job at M&S. The firm’s store estate had stagnated for years, with three quarters of full-line stores more than 25 years old. The retailer’s clothing and food ranges had also fallen behind the times.
Rowe made it clear from the outset that turning the business around would take several years. Today’s results reflect this. Sales fell by 3% to £10,377m as store closures resulted in lost revenues. Underlying pre-tax profit fell by 9.9% to £523.2m and the full-year dividend was cut by 26% to 13.9p per share.
Store closure costs of £222m contributed to total exceptional costs of £438.6m. However, this was lower than last year and should fall again this year. Cash generation has improved and net debt fell from £1.83bn to £1.55bn during the year to 30 March.
Rowe says that he’s confident the firm is making “good progress restoring the basics.” However, delivery of these changes has “not been consistent.” For example, efforts to improve clothing performance by adjusting sizing and scaling back end-of-season sales have delivered promising results. But a slow supply chain and shortages of popular items have limited the financial benefits of these changes.
Food + Ocado
Things aren’t much better in Food, where the firm says waste levels are among the highest in the industry. However, there’s some hope that falling sales are stabilising. M&S reported a 0.4% increase in like-for-like food sales during the final quarter of the year.
Promotional activity has been reduced and prices have been cut on popular items, bringing them closer to mainstream supermarkets.
The firm’s big hope is that its partnership with Ocado will help to reinvent and expand this business online. M&S will invest up to £750m in this deal, of which £601m will be raised in a rights issue of new shares.
Pricing for this rights issue was revealed today. Existing shareholders will be able to buy one new share for each five shares they own, at a price of 185p per new share. That’s a fairly hefty 30% discount to Tuesday’s closing price of 271p.
What I’d do
My view remains that Rowe and chairman Sir Archie Norman are doing the right things. The group also remains highly cash generative and offers a dividend yield of about 5.5%. Although there’s still a risk of long-term decline, if I was an existing shareholder I’d continue to hold.
If I was considering a new investment, I’d wait until after the rights issue shares start trading on 13 June. This turnaround isn’t going to be fast, and I suspect the share price will remain weak for a while.