Blue Chip: Marks still makes sparks

The City may be wary, but you can count on M&S to keep delivering the goods
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The Independent Online
It is a common stock market curiosity that often when a company reports a good set of results, the shares fall. For Britain's bluest blue chip retailer, Marks & Spencer, which reported good half-year figures last Tuesday, the shares took a real pounding. Off a startling 5 per cent, or 26p, to 463p, they have since recovered most of that lost ground, to close at 484p by Friday.

Even so, the question remains as to why the market was so nervous. Partly it is just general bear market jitters, but there were some other trends that disturbed the market.

Chief of these was that M&S is set to take on another 2,000 staff over the next year, to boost customer service. Chairman Sir Richard Greenbury pointed out that the extra staff, who would raise total employment to 57,000, represented less than 4 per cent of its workforce. While the recruitment drive will add to costs, the company said it should be in line with the growth in sales. All things being equal, this means margins will stay broadly unchanged.

In addition, the profit before tax of pounds 431.5m fell short of expectations, which had been for up to pounds 465m. The dividend, up 10 per cent to 3.3p, also fell below best expectations of 3.5p.

Even so, these are, by any standards, a solid set of figures. Developments which may have more long-term resonance for investors came in four areas. Firstly, Brooks Brothers, the once troublesome United States preppies' clothing store, returned to profit. Secondly, profits from Asia rose 7.5 per cent, held back by expansion costs. If anecdotal comments on the group's progress in Hong Kong are true, Marks & Spencer is busy forging itself an Asian brand identity which is set to emulate its success over here.

Thirdly, in home furnishings, sales rose 27 per cent, while catalogue orders rose 70 per cent. Finally, its financial services arm, quietly maturing in the background, saw profits jump a satisfying 25 per cent to pounds 33m. In a sly dig at rival Sainsbury's recent bid to move into banking, vice chairman Keith Oates noted that M&S had obtained a banking licence 11 years ago, and has begun offering customers overdraft facilities on its Personal Reserve account.

Further growth can be expected from these areas. Mr Oates threw down a challenge to the City when he said: "we have virtually unlimited opportunities overseas." As well as further expansion in Germany, where the new M&S store in Cologne is performing ahead of budget, the company is looking at South America, Poland and further expansion in Europe. In Latin America it is considering Argentina, Brazil or Chile.

Curious, but true, it has it exported the familiar high-street format to Paris and Germany almost lock, stock and barrel. And without any demur, the French and Germans have taken to it like ducks to water. The Paris M&S sells prepacked sandwiches with the same fillings as it does in Manchester or Marble Arch.

The company aims to be a volume retailer in these markets. The overall result is that the fashion-conscious French, for example, can buy quality clothes but usually at a noticeable saving compared with similar items available in other French department stores.

Despite the company's ambitions overseas - which now account for almost 17 per cent of sales - Britain remains its cornerstone. Of the total pounds 1.1bn earmarked for capital expenditure over the next three years, M&S expects to plough two thirds of that back into the UK.

On the high street, the picture remains somewhat obscure. There is clearly something of a mini-boom emerging. Burton, which also reported figures last week, saw its full year profits leap 54 per cent to pounds 151.6m. The latest CBI distributive trades survey, for September, said retailers reported high-street sales at their most buoyant for eight years. And more retailers are stocking up in anticipation of increased demand than at any time in the past 12 months.

Against that, the boom - which many retailers are anxious to play down - has yet to reach the proportions of the late 1980s, when Britain was engulfed in a mad consumer frenzy. Nor can we tell how sustainable this trend will be: Chancellor Kenneth Clarke's quarter point rise in base rates to 6 per cent is almost certainly the prelude to further tightening. Interest rates may rise another point or more during the next 12 months, while the coming general election will further unsettle the mood of Britain's shoppers.

The business, however, looks well positioned against its rivals. In terms of valuation, the shares sit at a modest premium to the market of 13 per cent for the year to March 1997. At that level, they yield 3.3 per cent - a tidy payout, when, over the past five years, the shares have performed in line with the market. They remain a long-term buy.

One last word to the wise. Almost without fail, shortly before Christmas stories fly around the City of the big retailers encountering poor Christmas sales. Usually, it's no more than the City rumour machine working overtime: come January, M&S almost invariably reports strong Christmas sales. Given the current retail climate, it seems unlikely that the story will be any different this year.

Marks & Spencer

Share price 484p

Prospective p/e 18.1*

Gross dividend yield 3%

Year to 31 March 1994 1995 1996 1997* 1998*

Turnover (pounds bn) 6.54 6.81 7.23 7.87 8.54

Pre-tax profits (pounds m) 851.5 924.3 990.8 1,127 1,257

Earnings p/s (p) 21.5 22.6 24.3 27.1 30.6

Dividend p/s (p) 9.2 10.3 11.4 12.7 14.2

*Nikko Europe forecasts