M&S Adds to Bad Week for UK Retail

Marks & Spencer's slide in first-half profits comes as Mothercare shuts all UK stores and shopping mall operator Intu shocks investors with a possible rights issue

James Gard 6 November, 2019 | 11:03AM
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Marks & Spencer

Marks & Spencer (MKS) has reported a sharp fall in first-half profits, giving UK investors yet another insight into the parlous state of British retail. A sharp fall in shopping centre group Intu’s share price, as well as news that all 73 Mothercare UK stores will close, has piled on the bad news for the retail industry this week.

M&S pre-tax profits were down 17% to £176.5 million and group revenue was 2.1% lower than the same period in 2018 at £4.8 billion. Like-for-like food sales were up 0.9% in the first half compared to 2018 but like-for-like clothing and home sales were down 5.5%. Total group sales were off 2.2% in the period.

Still, investors were cheered by chief executive Steve Rowe’s insistence that the firm’s multi-year turnaround programme is on track. Shares rose 3% to 188p, but they are down nearly 100p since the start of the year. The poor share price performance saw the firm relegated from the FTSE 100 for the first time.

Ian Forrest investment research analyst at The Share Centre, argues that the share price bounce could be a relief rally that the results were not as bad as some had expected and that £75 million of cost savings may also have been a factor.

He says “the market will want to see the improved performance feed through clearly into rising profits and better dividends” before fully backing the company’s turnaround story, adding that online sales growth of just 0.2% is still a cause for concern for M&S investors.

The dividend has fallen 40% in the year, from 6.5p to 3.9p, although its yield has been bumped above 7% by the slump in the share price this year. With that dividend yield, Marks & Spencer would make it into our monthly round-up of the FTSE’s highest yields if our analysts thought it had a “moat” or sustainable competitive advantage. In our monthly round-up, we warn investors to beware potential “dividend traps” where the yield has been inflated by a falling share price even though the company is slashing its payouts.

Why Can Next Profit From Clothes When M&S Can't?

While Next and M&S are in different retail segments, they are competitors on clothing, an area where Marks & Spencer has recently struggled. Next’s most recent results showed that online sales are thriving, with internet sales up 9.3% in the last quarter - although high street sales were down 6.3%.

In clothing, M&S chief executive Steve Rowe says the company is “making up for lost time”, but says there has been a positive response so far to new ranges because of an increased range of sizes – a familiar bugbear of loyal shoppers described by M&S as its target “family customer”.

Marks & Spencer has also recently launched a "buy now, pay later" scheme, but Morningstar columnist Rodney Hobson believes that may not be appropriate for a company aspiring to appeal to more affluent customers.

The high street’s malaise was underlined this week when Mothercare (MTC) announced on Monday that the UK arm was going into administration. On Wednesday it was confirmed that all 79 stores are to close, with the loss of 2,800 jobs, but the Mothercare brand may live on in other retailers’ stories or online. The parent company, which listed in 1972, is expected to remain on the London Stock Exchange.

Meanwhile, Intu Properties (INTU), a FTSE 100 commercial property firm with a number of high-profile shopping centres such as Manchester’s Trafford Centre, put out a market update on Wednesday that was badly received by investors. Shares were off 12% to 35p as the group braced investors for a rights issue and/or the sale of its assets as rental income has tailed off.

Chief executive Matthew Roberts – who took up his in April – specifically mentioned the impact of company voluntary arrangements (CVAs) on the retail sector. CVAs allow companies such as Mothercare, which entered into one last year, a way of buying the company breathing space from creditors. Critics argue that the scheme allows retailers to postpone the inevitable, creating a class of “zombie” companies that stagger on until the next crisis.

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James Gard  is content editor for Morningstar.co.uk