M&S figures set to disappoint

Marks and Spencer will announce its first-half figures on Wednesday 5 November, and traders are expecting a fourth consecutive decline in first-half profits.

An M&S branch
Source: Bloomberg

In May, Marks & Spencer announced a 4% decline in full-year profits. It was the third consecutive fall in annual profits and also the lowest underlying profit since 2009.

The clock is ticking for CEO Mark Bolland; he joined Marks & Spencer from Morrisons four years ago, and investors are still waiting to reap the rewards of his £2.3 billion investment plan. Food sales are strong but general merchandise and clothing are weighing on revenue.

When it comes to the fashion division, Next is one of the retailer’s main rivals. Investment in online systems has seen Next’s full-year profits now overtake that of M&S, although the company’s clothing unit returned to growth in the final quarter of last year. Full-year sales in the general merchandise division dropped by 2.4%; Mr Bolland doesn’t expect a quick fix and it will take ‘some time’ to turn it around, however direct buying from Asia is one way to rectify to this.

Given the selloff in the sector, equity analysts are moderately bullish on the retailer. Out of the 29 ratings, ten are buys, 11 are holds and eight are sells; the average target price is £4.51. Ordinarily, having 28% of the ratings as sells would be worrying, but when compared to its peers it is reasonably positive. The percentage of broker ratings that are sells on Tesco, Sainsbury’s and Morrisons is 23%, 33% and 52% respectively.

A shock was sent through the supermarket sector in August when Tesco issued a profit warning in August and again in September. Since Tesco announced its profits may have been overstated, the price of M&S’s shares has not been recouped from the downward moves.

The unexpected cut in full-year profit forecast from Next last week initially pushed Marks & Spencer’s shares lower, but a recovery has been made since.

M&S’s fashion sales will be of interest to traders in light of the announcement from its rival. Next blamed the unseasonably warm weather for poor sales of its winter line and M&S will possibly cite the same problem.

US hedge fund Lone Pine Capital has built up a £100 million short position on the retailer ahead of its first-half figures, and according to the Financial Conduct Authority the Greenwich headquartered fund started building its short position in August.

Analysts are expecting six month sales and operating profits of £4.93 billion and £300 million respectively.

Marks & Spencer will post its full-year results in May 2015, and dealers are expecting revenue of £10.59 billion and adjusted net income of £540 million. This compares with last year’s full-year revenue and adjusted net profit of £10.31 billion and £520 million.

The stock has been in a downward trend since February, and resistance is being encountered at the 100-day moving average of £4.23. Poor results could push the price below the psychologically important £4 level. If it is breached, the October low of £3.81 would be in sight.

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