Marks & Spencers share price drops 2%! Is now the time to buy?
There was a time when you could count on Marks & Spencer (LSE:MKS) for your food, clothing, and to be in the FTSE 100. Earlier in the year, after posting a string of disappointing results, its time in the upper leagues came to an end. The company was relegated to the FTSE 250.
Recently, its share price has fallen again. Surely, the high street stalwart is in the ‘bargain buy’ category now?
Something doesn’t fit
On 6 November, M&S once more posted disappointing results. Tough trading conditions mean its clothing and home line suffered. Half-year revenue dropped by 2.2%, with profit before tax and adjusted earnings down 17%. Like-for-like sales for the food department grew by 0.9%.
I wrote several months ago about M&S’ link-up with the online grocer Ocado after acquiring 50% of the business. The half-yearly results state that plans for M&S’ to supply it is ‘progressing well’.
Cost savings of approximately £75m have been made in the first half-year, with 17 full-line stores closing.
The prospective dividend yield is an attractive 7%, as you might expect given the share price has slumped by over 50% in the past five years. This drop makes the price-to-earnings ratio a very low 7.
Ordinarily, these stats might get a value investor excited. But is there more to the story?
Both grocery and clothing retailers are struggling in today’s online focussed marketplace. Perhaps the partnership with Ocado might work, but I remain sceptical. From 2020, the online retailer will be stocking M&S goods on its site, instead of Waitrose produce. Online retail is an area where M&S is currently weak, so on the face of it, the deal makes sense.
The fears for investors were that Marks & Spencer had overpaid for its stake in Ocado. A price-tag of £1.5bn is high for a technology company with only a 1.3% share of Britain’s grocery market.
It is a difficult one to call. On the one hand, buying shares could pay off in a big way for brave investors. With growth – albeit slight – posted for M&S food in its recent report, we know that customers are still willing to pay for its premium grocery product.
Yet, it will be an almighty gamble and probably a very bumpy ride. The average shopping basket for a M&S shop is £20, proving that customers are using the retailer as a place to top-up their weekly shop. Perhaps when using an app or website, people will feel more frivolous and that total may creep up.
In any case, the results, although better than the market anticipated, are far short of being impressive to me. Add a general election (and Brexit?) into the mix, and I will be avoiding these shares.
T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019