M&S share price needs a discount

downloadA quick analysis on M&S share price reveals that it had a stellar performance over the last 12 months, appreciating by  30% and outpacing even the archrival Next (NXT LN), which is up by “only” 12%.Screen Shot 2015-04-17 at 22.59.21 The results announced on 2/4/15 have shown growth in General Merchandise segment which accounts for 45% of total revenue) after 4 years of declines, driving investor optimist and hopes for cash returns.  Of course easy comparatives helped to paint a more positive picture and I believe the consensus already incorporates an optimistic growth expectation with margin improvement. However, it seems like the consensus ignores the company’s weak balance sheet and it would be very interesting to see on the upcoming full year results (20/5/15) what steps management took to heal the weak spots we discuss on this post.

Segments: Most of the revenue is UK driven and split between 50% in Food and 40% in General Merchandise. M&S international division is heavily exposed to Russia, Ukraine and Turkey and faces continuing deterioration








Online: M&S made a promising start building its own distribution centre in Doncaster but it suffered from an outage, although last year management spent GBP 247m in “Supply Technology” CAPEX.

Consensus on M&S share price : appears quite optimistic, in my view, as it assumes for the next 2 years a similar growth rate to Next although half of M&S revenue comes from food sales (are actually in deflationary territory). Consensus also expects an improvement in Operating Profit margin (OP), assuming no-margin erosion from online sales.


Volatility: we can see Revenue and Margins for M&S  have been historically volatile and difficult to predict. Trading at x17.2 times next year’s bloomberg earnings v x16.8 for Next  (NXT LN), the stock is priced for perfection.


Spending money unwisely: in the past return on some investments was particularly poor, to cite two examples: M&S bank suffered, over the last 2 years GBP 66.3m losses for misselling Payment Protection Insurance. This is about half the operating profit from the International business. It’s is quite impressive how a tiny little revenue segment can make such damage…The second example is about  the GBP 99.3m write-offs related to the closure of a logistics site, store closures in Ireland, China and Czech Republic. Well, I thought closing stores and opening new ones is part the bread and butter of a retailer, however M&S took the view these are ‘one-offs’ and decided to exclude them from the normal operating profits.

Audit rotation: M&S put their Audit on tender and Deloitte won, replacing PWC that had been auditing them since 1926 (this means loyalty..) Reading the audit report it is interesting to see that ‘Supplier Rebates’, a key area of risk highlighted blew up  at Tesco’s wasn’t picked up as a risk. I am looking forward to reading Deloitte’s report and see if they consider any new areas of risk (Ukraine maybe?)

Magic picture – Find the hidden debt: A very common “window dressing” trick among retailers is to make “sale and lease back” transactions, to reduce debt and improve liquidity. This is a temporary cosmetic adjustment as it relies on short term leases (that can be expensive) to fund long term infrastructure needs.
The total amount of these commitments amounts to the staggering GBP 4.6bm. This is almost half of today’s market capilisation. (anyone steel hopping for a divi increase? )

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Old habits die hard and last year M&S indulged to one more “sale and lease-back” to get some extra cash that needs to repay soon as a rent loan.

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Pension conundrum: Last actuarial valuation took place in March 2012 and estimated a deficit of GBP 290m. The next valuation is due to be carried out for March 2015. Probably actuaries are working on it as we speak an update is expected by November 2015. In this low interest environment is very likely the deficit will be much wider as the expected return from the fixed income investments has shrunk.

Derivatives: The disclosure on hedging says management took a position on a GBP 1.6b derivative to lock the FX exposure related to supplier payments. However, the trade payables (i.e. suppliers) are GBP 1.14b. So that leaves us with a speculative naked position of GBP 0.5b, unless there is something I ‘ve missed..

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Adjusting Leverage :Net Debt as reported at year end (29/3/14) was GBP2.46b, adding the pensions GBP 260m and the recent Sale and Lease back of GBP 100m Net Debt increases to GBP 2.82b. EBITDA was GBP 1.24b, adjusting for store closures excluded from reported profits (GBP 0.99m), EBITDA declines to GBP1.14m The new Net Debt / EBITDA ratio becomes x2.47 higher than targeted x1.5 – x2. If we consider the operating lease commitments as borrowings, because they have exit clauses and management intends to honour them, then Net Debt skyrockets to GBP 7.4b and Net Debt to EBITDA deteriorates to x6.5
Good luck to the shareholders awaiting for share buybacks to boost M&S share price  🙂

A snapshot with key ratios:

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