MONITOR: MARKS & SPENCER
Saturday 22 May 1999
retailer's profits have fallen sharply
THE INHERENT danger of great success makes the troubles of M&S wholly predictable. The only real surprise is that its record of success lasted so long. We may also reflect that we can be glad to live in an economic system which positively thrives on the constant rise and fall of different companies. The maiden aunt of the High Street may yet recover herself and learn from her mistakes. Most people would welcome that. But it is a virtue of capitalism that as individual companies rise and fall (and sometimes rise again), the consumer gains all the time.
AFTER ITS expansionary binge, M&S is suffering a monumental hangover. The rash of store openings has left M&S looking over-extended. And its return on capital is down from 22 per cent three years ago. Rebuilding investors' confidence was always going to be difficult. But M&S has made a fair start. Long overdue reforms are being embraced with encouraging vigour. More attention is being paid to merchandising and what customers want. Given an under-leveraged balance sheet and its low return on capital, M&S should consider returning surplus capital to shareholders. With shares still on a market rating, M&S is hardly cheap. But there should be an upside from here on.
MARKS & SPENCER'S problem is that it is a very old-fashioned sort of company, which found a winning formula decades ago and failed to see the world changing round about it. It is a company where "head office knows best". That approach has worked for Coca-Cola and McDonald's. But the fashion business can require a more nimble style.
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