M&S Goes For Growth

Published in Company Comment on 13 September 2011

The iconic retailer's bold, new plan aims for £1 billion of extra sales by 2014.

On Monday, renowned retailer Marks & Spencer (LSE: MKS) announced a £600 million store refit aimed at boosting sales and margins.

Bolland's big idea

Marks & Spencer's latest chief executive, Marc Bolland, has been at the helm since May 2010. Following the departure of M&S chairman Sir Stuart Rose in March this year, Bolland, the former boss of Morrison (LSE: MRW), has been free to impose his own vision on his iconic employer.

Of course, this is not a job, it's an M&S job, so Bolland has his work cut out pleasing millions of Middle England customers, as well as his shareholders. Against a background of falling disposable incomes, rising inflation and VAT, and low consumer confidence, Bolland certainly has his work cut out for him.

Nevertheless, the Dutchman has unveiled a £600 million, three-year revamp designed to modernise M&S, notably its once-admired clothing range. The first part of this overhaul involves spending up to £450 million on store upgrades, adding 1,000 new food lines, and improving in-store concessions and sub-brands.

The second stage, costing a further £150 million, will focus on in-store 'rustic' bakeries, gourmet delicatessens, accessories, M&S lingerie, and improved technology. Initially, M&S will install deli counters at six stores, to be rolled out if fresh pasta and the like prove popular with its discerning shoppers.

All change, please

Initially, up to 100 stores will be given a facelift in the first quarter of next year, with the remaining estate of around 600 stores to be freshened up by the middle of 2013.

Bolland argues that M&S is not going more upmarket and will remain competitive on price. However, perhaps the most radical step of all is his plan to remove the M&S brand from all own-range clothing, which accounts for almost half of its sales. Instead, labels will read 'M&S Woman' or 'M&S Man'. As brand turnarounds go, this is up there with the boldest -- and riskiest!

Also, Bolland plans more emphasis on M&S clothing collections such as Autograph, Blue Harbour, Limited Collection and Per Una ('for one woman'). To improve store navigation, these brands will be given their own distinct 'sub stores' for a unique look and feel.

Will this work?

As well as updating its stores, the UK's biggest seller of clothing is rolling out new M&S ad campaigns for the autumn. These feature Hollywood A-lister Ryan Reynolds, Victoria's Secret lingerie model Rosie Huntington-Whiteley and Dolce & Gabbana's British hunk, David Gandy.

Clearly, in common with other high-street rivals, M&S is desperately keen not to allow the economic slowdown to cut into its sales, margins and profits. But will this supposed antidote to retail decline work?

Bolland's goal is to increase M&S sales by £1 billion over the next three years. In my view, that's a tough stretch goal, even if this latest investment succeeds. What's more, M&S seems to become addicted to store refits, as they seem to happen every three years or so.

For example, Sir Stuart's multi-year, £2 billion revamp failed to inject new life into M&S shares after it was unveiled in 2006. As I write, the M&S share price is 319.5p, up 1% in the day, but almost 60% below the heights of May 2007, when it soared to almost 750p.

Buy M&S

At present, M&S shares trade on a forward price-earnings ratio of 9.2 and offer a fat dividend yield forecast to be 5.6%, covered twice.

Hence, while I can't say whether I'll be lured into the revamped M&S stores, I can say that its shares look under-valued. Together, the chunky dividend and single-digit P/E make this one brand worth buying.

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Comments

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IDPickering 13 Sep 2011 , 4:22pm

Excellant article Cliff. Thank you.
M&S are a more recent addition to my HYP(ISA), and I'm mighty glad to have them on board.

CunningCliff 13 Sep 2011 , 4:26pm

Thanks, IDPickering. I agree, M&S looks a shoo-in for a high-yield portfolio at 5.6% a year. Juicy!

Cliff

CunningCliff 13 Sep 2011 , 4:27pm

Here's a terrific example of M&S customer service going viral right now:

Service with a smiley dinosaur from M&S
http://www.guardian.co.uk/uk/2011/sep/13/smiley-dinosaur-marks-and-spencer

Brilliant stuff! :0)

Cliff

shinygoldcar 13 Sep 2011 , 6:34pm

Yes I agree. Good article. P/E has been low for a while.

ANuvver 14 Sep 2011 , 1:13pm

Can you take the shares back if you're not happy with the yield later?

ANuvver 14 Sep 2011 , 1:24pm

Sorry, too flippant. Been watchings Marks for a while. I think Rose's marketing played well to the brand's core values (it's always a good thing when a campaign is so universal and clear that it attracts satire). But am concerned that it hasn't seemed to buoy up the SP. More of the same in an even tougher retail environment is a bold move.

Think I'll wait and see if systemic downward pressure on equities gives me a better in before the Christmas and sales period.

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