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M&S: boost or bounce?

Could Marks & Spencer’s recent share price gains amount to little more than a bounce? Chief market strategist Brenda Kelly discusses possible future movements for the stock.

Reports from the retail sector over the past few weeks have been mixed. John Lewis has fared considerably better than most, with sales aided by a cartoon rabbit and a bear, while in stark contrast we saw a profit warning from Debenhams. Next is up 9.8% today having shown an 11.9% increase in sales, and the news has helped to drag a few other retail companies upwards – including M&S which has risen by as much as 4.42% in early trade.

Technically this price action may merely be on a short-covering tirade, en route to testing the 200 daily moving average at 460p before completing another leg down. The maximum move up, if we take note of Head & Shoulders which saw its neckline breached on 9 December, should be capped around 470p. The reversal pattern suggests that, while below the neckline, we may see 405p tested long before 500p is witnessed again. Any rise and close above 470p tends to negate the downside bias and may well set the stock on a move back towards 500p. Q3 earnings due out on 9 January could make for interesting reading.

The reality is that further pressure on household incomes is likely to mount, as expectations for a potential rise in interest rates ramp up. It’s true that the credit squeeze may be starting to abate, yet with little or no wage growth in the offing – despite a return to growth in the economy and a perceived reduction in inflation – there are still a few retail areas that are likely to suffer the brunt.

Online business is key

As my colleague Alastair wrote, online business is most certainly the way forward if a company is to drive sales; this has been borne out by the earnings release from Next this morning and subsequent moves to the upside in the share price. The company first listed back in 1926 and has been something of a British stalwart, with chains of some 400 stores in the UK and a further 150 overseas. Its physical footprint globally cannot be argued.

Unfortunately, however, the struggling fashion division of M&S has been through setback after setback, in part due to an inability to decide upon and target the right demographic. More than one outsider has stated that its latest ranges of clothes has failed to capture the imagination of consumers with small disposable incomes. Gillian Ridley Whittle was the latest development and buying director to depart in October, hot on the heels of predecessor Janie Schaffer who was only in the role for three months. This left a lot of pressure on chief executive Marc Bolland to revive clothing sales.

Belinda Earl, the former chief executive of Debenhams, Aquascutum and Jaeger replaced Kate Bostock as style director in September 2012. This is a lady who herself admitted that the only time she ever went to Marks & Spencer was to buy food and underwear, so it has been a big ask to task her with putting the retailer on the fashion map. Ms Earl’s decision to target the 30-plus female – hoping that the customer will deviate from her usual purchases – has yet to be deemed a success; although the share price has, in the short term, reacted favourably to her tenure. Now, at a two-and-a-half year high, it is pushing through the 420p level convincingly for the first time since late December 2007. Pleas for investor patience from the chief executive may be wearing thin, however, especially when half year profits fell 9% in H1 to £262m.

Better appetites in food sales

Can the food area of the business be sufficient to offset shortcomings in the fashion division? The busy Christmas period might alleviate any negativity, but it will have to be a lot better than last year.

Judging by some of the consensus forecasts (not wholly reliable, I’ll grant you) all three listed supermarkets – Tesco, Sainsbury's and Morrisons – could report falls in like-for-like sales over the Christmas period.  It would appear that the German discount stores have succeeded in broadening their shopper base. The increasing market share for Aldi and Lidl is clearly charged by the economic slump and weakened disposable income, so one could expect that M&S will see adverse effects to food sales.

In 2012, during the two key Christmas trading weeks, the company saw record sales of $330m which were actually below expectations. It also reported a 1.8% fall in like-for-like UK sales for the 13 weeks before 29 December. A 2.7% rise in food was offset by a 2.2% fall in general merchandise. Group net sales crept up by just 0.6% versus the same period the previous year. Overall general merchandise was the area that remained challenging.

In the December just passed M&S ran a ‘Mega Day’ sale the Saturday before Christmas, cutting 30% off all clothing and general merchandise in a bid to drive sales in the last weekend before Christmas. To me this signals concern on behalf of the company; to blink so early and provide discounts the week before Christmas doesn’t inspire confidence that the second half of the year was any better than the first. I’d also question the profit margins as a result of said discounts.

It’s also important to note that the weather over Christmas in 2012 was markedly better than in 2013, and the drastic action of such a sale this winter may have been fruitless; the weather preceding Christmas Day 2013 wasn’t altogether pleasant, and the stormy conditions would not have encouraged people to go out and take advantage of the special discounts on offer.

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