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Marks And Spencer: the management better hope Margins Are Sustainable

By Chris Bailey | Tuesday 11 July 2017


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


The macro news today showed a glimmer of hope for retailers with the UK British Retail Consortium (BRC) data showing a 1.2% rise in June like-for-like retail sales compared to a year ago.  All hail the hot weather and the Eid celebrations which apparently - according to the experts - helped out.  
 
As the old saying goes 'retail is detail' and most retailers would agree that it is tremendously blurry out there as the online shift continues at the same time as a bloated consumer faces up to that classic squeeze of too much debt and typically muted pay rises.  The key to success with such a backdrop is forming a link with your customer base. 
 
Marks and Spencer (MKS) used to be that type of business but its glory days have disappeared into the rear view mirror long ago with anyone under the age of 60 thinking about them predominately as a posh supermarket to get your lunchtime sandwich or weekend treat at.  Fortunately food sales now account for nearly two-thirds of the company's revenues.  Today's trading update waxes lyrical about its 'New Simply Food stores continuing to perform ahead of expectations'.  In today's world of convenience and experiences, M&S Food appears to be well-positioned. However (and not helped by the timing of Easter) the data released today confirmed in the 13 weeks to 1 July the division generated like-for-like sales of minus 0.1%
 
Well even the UK's underperforming largest supermarket operator would be disappointed with this. 
 
And then we get to the previously fabled clothing (and home) division.  No surprises there that once again sales were down with a fall of 1.2% in like-for-like sales in the period to 1 July being worse than market hopes.  Yes, even those over-sixties are not spending like they used to...mainly because demographically an ageing consumer base has one ultimately terminal problem.  There is though a small smidgen of hope with the observation from management that 'we continue to grow full price sales in Clothing & Home, with reduced discounting and no clearance sale in the quarter'. 
 
Well bully for that!  In plain English what they are doing is letting sales volume slide by only focusing on higher margin business.  Now as a business strategy this is a good one.  The trouble is when you are surrounded by a fast changing retail dynamic it can leave you sitting high and dry, proudly selling little.  And as any retailer will tell you, covering your pretty serious fixed costs is the number one objective of any business, even if you do own a decent slab of freehold property. 
 
The next set of formal numbers from M&S are not due until November although I don't rule out another trading update if things go a bit awry.  M&S management better hope that Margins Are Sustainable otherwise the retail tsunami will claim another high profile victim in the form of closed stores, a faded brand and compressed dividend payments.  I think with a still premium rating to other surviving but under pressure retailers even with a margin focus we test the 'post Brexit low' sub three quid a share. And then maybe i get more interested...maybe. 
 
That's enough to make you choke on your posh sandwich this lunchtime...

Chris Bailey is the editor of Financial Orbit


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