Investment View: Despite Bolland’s efforts, steer clear of retail’s Titanic

Investors in Marks & Spencer seem inclined to take a long-term view with its management

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The Independent Online

There’s one retailer I’d have no hesitation investing in right now: John Lewis. Unfortunately that’s not possible. It’s a partnership, owned by its staff. Perhaps that’s part of the reason why the business has been so spectacularly successful. The unusual ownership structure for a retailer means management can take the long-term view.

But let’s have a look at some of the bigger high street retailers that you can invest in.

Funnily enough, investors in Marks & Spencer (M&S) seem inclined to take a (relatively) long-term view with its management. After numerous rearrangings of the deck-chairs at the top of the retail sector’s Titanic, they seem ready to give the current captain, Marc Bolland, some time to avoid the iceberg, although they should surely make their feelings known if the company tries to suggest he’s worth a bonus, given the current struggles.

One reason why an undeserved bonus might be paid is that M&S shares haven’t performed badly over 12 months.

When this column last looked at the company the recommendation was avoid, with the shares at 323.1p. Since then they have increased in value by about 15 per cent. That’s not bad, but some context first: Next added nearly 50 per cent over the same time period. Debenhams, nearly 60 per cent.

The M&S share price won’t be helped by its trading statement last week. Every time the numbers are repeated it’s as if another arrow has been fired at Mr Bolland’s reputation, built up by success at Morrisons, which has struggled since he left.

Here they are again: excluding the contribution from new store openings, general merchandise (clothes and such like) was down 3.8 per cent over the crucial Christmas trading period. The City had expected a fall of 1.5 per cent. Food continued to hold up, with a rise of 0.3 per cent. But that was still a disappointment when set against analysts’ forecasts. It’s also worth noting here that the 3.8 per cent fall would have been much, much worse were it not for a 10.8 per cent rise in online sales. Marks’ stores are not doing the business.

By the middle of this year we will see if Mr Bolland’s prescription for what ails M&S can make a difference to those stores. That is John Dixon, a star at the food business who has no experience of clothes, and Belinda Earl, a part-time style director who has run Debenhams and Jaeger. M&S trades on 11.2 times forecast earnings for the year ending 31 March while offering a 4.5 per cent yield. The dividend payout is nearly twice covered by earnings – M&S is still a profitable business – so is stable for now.

But the valuation is less important than whether you feel the Dixon and Earl show can turn around a seemingly interminable decline with some fresh new ranges. If you’re sceptical (I am – I think it will require something more radical), avoid the shares.

Next trades on 14.2 times earnings for the year ending 31 January with a prospective yield of 2.6 per cent. For 2014 those figures are 12.9 times and 2.9 per cent. However, we know what Next is all about. It serves a much younger demographic, which laps up its online Next Directory business. Sales during the Christmas period there increased by 11 per cent. The shops were less cheery. Analysts think sales at stores open at least a year, commonly known as like-for-like sales, fell just over 1 per cent. The company doesn’t offer this figure, but M&S would kill for a number like that.

With clever stock management and limited discounting ,Next is forecasting that profits for the current trading year will be good. It promises to grow them more next year.

The shares look toppish right now. The trading environment remains tough, and retailers are prone to swing up and down. Sometimes they get it wrong. All the same, I’d still want to hold Next, because it tends to get things right.

As for the aforementioned Debenhams, sales were good at the department store chain. But this company had to cut prices to draw customers in, and so profit expectations have been lowered. The shares came off quite a bit as a result of that. For now, I’d steer clear. The company is not all that expensive at 10 times expected earnings for the year ending 31 August with a 3 per cent yield.

But department stores are not where I’d want to be investing given the tough climate for consumers. However, if the shares fall more it may be worth buying on the weakness.