Marks and Spencer slipping again

The retailer will reveal its first-half numbers on 4 November, and as the first-quarter results were flat, its stock is sliding. 

Marks and Spencer shopping bags
Source: Bloomberg

In May 2015 the retailer bucked the trend of poor results as annual profits increased for the first time in four years, and the food business had an ‘outstanding year’. Most of the major UK supermarkets are sustaining heavy casualties in the price war they are engaged in, but Marks & Spencer is at the higher end of the range, so it is relatively secure. M&S attract more middle-income customers and its success is a sign the professional classes are happy to spend on good quality products again. Meanwhile Sainsbury's, WM Morrison and Tesco are suffering at the hands of the deep discounters like Lidl and Aldi.

Marks and Spencer’s general merchandise department – which is largely clothing – is still struggling and the division registered a small decline in sales. The clothing business, and in particular the womenswear unit, has been an area the CEO Marc Bolland has been trying to make into a success for years. Mr Bolland recently stated he plans to stay on in the top job for at least two more years as he feels the turnaround is beginning.

The rise in earnings was more down to cost cutting than increased revenue growth. The first-quarter update wasn’t amazing and Mr Bollond doesn’t want his strategy to stall. The departure of John Dixon as head of clothing over the summer was a major blow to the company, seeing as the division is already underperforming.

When Marks and Spencer reveals its first-half results, traders are anticipating revenue of £4.95 billion, which compares with last year’s second-half revenue of £5.4 billion. The company will announce its full-year results in May 2016, and dealers are expecting revenue of £10.54 billion and net income of £570 million which is broadly similar to the revenue and adjusted net income in the previous year.

Investment banks are bullish on Marks and Spencer, and out of the 31 ratings, 15 are buys, nine are holds, and seven are sells. The average target price is £5.69 which is 10.7% above the current price. Equity analysts are less bullish on Sainsbury’s, and out of the 26 ratings, six are buys, 11 are holds, and nine are sells. The average target price is 266p, which is fractionally lower than the current price.

The share price has been rising since September 2011 and it hit an eight year high in May, but it has been in decline since. A move back above £5.20 could be a sign the stock is bucking its recent downward trend and then the next stumbling block will be £5.50. The May high of £5.99 will be the target beyond £5.50. If £5.20 isn’t cleared, further declines can be expected and 475p will be the target, following that the 400p area will be the next level to watch. 

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