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M&S out of fashion
Retail titan Marks & Spencer’s (MKS) half year results (8 Nov) reveal an 18.6% underlying pre-tax profit slump to £231.3m amid another drop in Clothing & Home sales. However, CEO Steve Rowe has a strategy to return M&S to sustainable profitable growth which we think investors should back.
Following a ‘forensic review’ of the retailer’s store estate at a time when shoppers continue to migrate online, Rowe will reduce M&S’ reliance on fashion. He plans to shutter around 60 UK Clothing & Home stores over the next five years. In food, where M&S now has a record market share, Rowe remains committed to the roll-out of Simply Food outlets.
Internationally, M&S will focus on its profitable franchise model whilst exiting 10 loss-making owned markets through the closure of 53 stores (including 10 in China and seven in France) at a cost of £150m-£200m.
Sensibly, Rowe has also decided not to make an additional return of cash to shareholders in the second half given the costs required to fund his restructuring, though the cash-generative retailer held the half year dividend at 6.8p.
Shore Capital believes that ‘the component parts of his plan have individual and collective merit and as such do prime M&S for a brighter more profitable future.’ However M&S is a high-risk opportunity, hence the broker has placed its forecasts and prevailing ‘Buy’ recommendation under review, ‘until we have greater clarity as to the quantum of medium-term financial expectations.’ (JC)
Continuing weak clothing sales are cause for concern, yet Rowe’s plan is decisive and 340.8p looks a good entry point.