What: Marks and Spencer (LON:MKS) will release its latest trading update at 07:00 ahead of the AGM at 11am. The market is expecting a 0.5% uptick for overall sales, with food sales leading the way and rising by 5.5%, helping to overcome the 1.5% expected decline in womenswear and homeware sales. Although the womenswear sales are expected to decline, it would be at a slower pace than the 5.9% drop at the end of 2016.
The success or not of M&S’s latest trading update is likely to hinge on womenswear sales for Q1, along with an update on how the 5-year turnaround plan under the relatively new CEO Steve Rowe is taking shape. Analysts are split as to how the turnaround plan is working: some seem happy that it will bear fruit, while others believe that the it could be more costly than planned. Along with the squeeze on the consumer as inflation outpaces wage growth, M&S will need to persuade the market that it has a decent product offering in its womenswear department that will attract consumers before the share price can stage a decent rally.
How: With M&S’s share price still lingering at the 340p mark, how the market responds to Tuesday’s trading update could determine the direction of the share price over the summer months. Ahead of this update the stock has picked up from the lows of 332p, however, the recovery has been limp so far, and may need a decent earnings report for it to really get going and return to the April highs just under 400p.
As we mention above, the squeeze on the consumer is well-known, and its impact on the share price of UK’s large retailers like M&S and Next (LON:NXT) has already been priced in. Due to this the key things that could drive M&S’s share price higher in the coming days include:
A stronger than expected sales figure for M&S womenswear on the back of the recent heatwave that may have triggered more sales than expected.
A pick up in wage growth, the latest data for May is released on Wednesday. Although this is a longshot, if it were to happen then we would expect the entire retail sector, including M&S, to benefit.
A reassessment of the retail sector by investment bank analysts who may have been too downbeat about the outlook for retail sales, especially since inflation is expected to ease later this year.
The chart below looks at some of M&S’s balance sheet fundamentals. The first chart shows cash flow and the second shows price-to-book value. As you can see, cash flow at M&S is at a healthy level and has picked up since 2014. Thus, M&S has the cash to implement its turnaround plan, but investors’ want to see signs that the plan is working on Tuesday before they dive into M&S shares. As we get to the mature phase of the stock market rally, investors are interested in value. M&S’s price to book ratio (P/B) is 1.73, compared with Next at 11.09, which could also entice traders to the stock. As you can see in chart 2, M&S’ P/B ratio has been falling consistently since 2014, and may be at the levels that entice buyers into the stock.
Overall, a lot hinges on Tuesday’s update. A decent report, at least in line with expectations, combined with a positive outlook regarding the 5-year turnaround plan could see M&S do well. A sales miss, however, is likely to be greeted by a wave of selling as the market is unlikely to give Steve Rowe too many chances to redeem the UK’s troubled retailer.
M&S cash and cash equivalent
M&S price-to-book ratio
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