This is not just a reversal. This is an M&S reversal.
Marks & Spencer, the UK’s third largest retailer, shocked the market last week by revealing that it is to begin stocking well-known brands as well as its own-label foods.
M&S bigwigs let slip that talks with big consumer groups are at an advanced stage and that further details on the initiative will come forward next week alongside their final results.
So, Coco Pops, PG Tips and Mars bars to be sold side-by-side with the firm’s own brand goods? It’s an idea the firm has toyed with repeatedly, but the rumour is carrying a little bit more weight this time around.
It would be a major turnaround and a radical shift in M&S’s business model. It comes as a lack of growth prospects has led to supermarket groups focusing on each others’ market share.
Tesco and J Sainsbury have been muscling in on M&S’s own-brand success, so M&S is retaliating by stealing some of their custom. This is arguably a necessary step as their share of the food market is stagnating.
The fear is that if this doesn’t work it would severely dent M&S’s growth credentials. What else can M&S promise shareholders if this doesn’t work? How can they argue a case for earnings and market share growth if they cannot steal Tesco/J Sainsbury customers through the twin-attack of own-brand and big brand produce?
Does this represent the last roll of the dice?
Marks lost its spark
Shares in the retailer have fallen 30% in the last six months. You could say such a fall represents a great buying opportunity. But is that true this time?
I’d like to say yes, but something’s holding me back.
I really want to buy into Marks & Spencer’s story, as it sounds compelling... Trading at a cheap multiple, steady profits, good dividends, stock buybacks and considerable brand clout — in an industry where that actually counts for something.
They don’t, however, make a lot of their money abroad. Despite having more than 240 stores internationally, they make less than 10% of their profits from foreign operations.
This could all change, as the company is trialling stores in China and increasing the rate of expansion in India, though JP Morgan has in the past doubted their ability to export their domestic form.
Another issue is that they operate in a sector unloved by brokers. The outlook for domestic retailers is a reflection of the domestic economy - pretty rough. Market share grabs are the move of the moment, but M&S, unlike some of their rivals, just aren’t winning a bigger share.
The corporate governance row is a storm in a teacup
"Where is this company going?" That’s the first question you should ask yourself when buying a stock.
Is it going to take-off overseas? It’s hard to say. Will the stocking of big brand produce help win market share? We don’t yet know. Is the board making the right calls? Judging by recent headlines, you’d worry... but this is has been majorly overplayed.
The M&S board is embroiled in a massive row over the role of Sir Stuart Rose.
The director is set to become chairman, on top of his existing responsibility as chief executive. Powerful investor groups are not happy.
Fund managers with significant stakes in M&S are strictly opposed to the move, and that’s fair enough. The duty of the board is to appoint, review and pay the chief executive. The board cannot do this objectively with dual-roles. That’s lesson one in corporate governance.
However, the way it’s been covered is unfortunate as the fund managers have reacted so violently that it’s put Rose’s future in doubt.
Stuart Rose was one of the City’s most celebrated executives up until the recent capitulation in share price, coincidentally around the same time investors started turning on him.
Beware fund managers’ posturing
This is all very familiar. Fund managers love to complain... They ganged up on Tesco for not disclosing initial figures for a US venture. This is the same Tesco that has delivered double-digit earnings growth for the past three years — and is forecast to continue.
And now, after talking Rose up for years, fund managers are now slating him. As far as I can tell, Rose is part of the solution, not part of the problem. The recent recovery has pushed M&S’s profit figures close to their former late 1990s glory.
Everybody loves a scapegoat, and the fund managers have found theirs. But I don’t think you can credibly blame individuals for market-wide ‘systemic’ frailties.
Plus, dual-roles are not a wholly bad thing. There are countless examples of companies well served by a dual chairman and chief executive. Nokia, ExxonMobil, L’Oreal, Berkshire Hathaway, Catepillar...these are companies that have or have had a dual chairman and chief exec at times of massive growth. On the flip side, UBS and SocGen have not had quite the same success, though there were other reasons for their decline.
Once this bone of contention is resolved, I will take another look at Marks & Spencer. Is this a text-book recovery stock or just another casualty of a flat-lining industry? The only certain thing right now is that it’s not yet time to make that call.
In the meantime, The Fleet Street Letter has a great retail plays that are uncorrelated to the slowdown in the UK economy. Find out more about this stock and the wider Fleet Street Letter portfolio...
Theo Casey
