My bottom line thinking on M&S is that this is a reasonably large, profitable business that has been poorly managed for many years. It’s size and profitability give it the time needed, not to be clever, but to introduce the same standards that already exist in its competitors. Whilst I recognise that at the same time as M&S improves to competitor levels the competitors might themselves progress I am hoping for M&S to become a fast follower.
As such M&S does not need to create the wheel, just hire senior enough people who have seen wheels elsewhere and can copy them, and then empower these people.
Anyone wondering about how much of a quality improvement is open to M&S need only read Next’s last set of results and compare it to the garbage M&S is putting out. This is not about the actual numbers but the clarity of thought, its implementation into action and the clear honest reporting of the results and expectations for the future.
What also has to be recognised with M&S is that it is something of a supertanker. It is hard to turn around and I am a believer in the old adage that everyone overestimates what they can do in a year and underestimates what they can do in 5 years. Just as an example of how difficult improvement will be it has an average store lease in excess of 20 years. This is at a time when more intelligent and faster moving retailers are dealing with sub 5 years on average. As such improvement, if delivered, will at first be very gradual. I am looking for the green shoots of delivery before investing further. I am reluctant to invest a significant amount at present as M&S has had a number of false dawns before and management teams that have talked a good story but failed to deliver.
Reviewing the 29/09/18 figures the business made £126.7m before tax. (I am not going to use management’s “adjusted numbers” as they are IMHO mainly a con job. The fact that they are still being included by the new management team is one thing I do find worrying. How much are they trying to fool shareholders and how much are they fooling themselves?) This is against a PY comparative of £118.3m. A broadly similar number suggesting to me that the business is not significantly worsening. There was also a positive cashflow from operations which suggests that the profit being claimed is genuinely being delivered.
In terms of green shoots M&S has set out 9 areas to act on. All of these areas are under the umbrella of “restoring the basics”. I would agree that largely they are fairly basic and as such can be achieved.
1- Reshaping the ranges and customer profile in Clothing and Home
M&S has begun to close 100 stores. 29 closed by the time of the accounts. Hopefully these are underperforming ones. Though I am not aware whether M&S has a robust and correctly thought through criteria. M&S essentially sells only its own product so there is no risk of try and then buy from someone else. I see that action on the store level, which was discussed before the current management team, has now begun to be enacted as a genuine green shoot. Still a massive amount to do with the long lease position, but finally being done.
M&S claims to be cutting lines and putting greater emphasis on its core lines and products. It is very hard to see this. Over the last couple of months I have done some store visits. I have noticed rails with so many items stuffed onto them the customers could not get them physically off to either try or buy. There was also for the ladies a “Classic” section – described by my companion as the “Coffin Dodger” range. An “Autograph” Section, a “Per Una” section – which had lots of stock, but only in big or small sizes (ie sold out of its key market sizes), a range based around Holly Willoughby (also and perhaps happily for shareholders largely sold out) and an unnamed but presumably everyone else section for ladies who are not Classic, Autograph, Per Una, and Holly Willoughby. In the men’s section they had, to my eye, some nice suits under the “Saville Row” section and some cheap and nasty suits which I would put down as their “day in court” range. They also had an Autograph section that seemed to be mainly smoking jackets. I saw no real evidence of focus on key lines or key lines in depth.
The company also claims to have refocused its marketing from group level branding to more effective programmes. I see no evidence of that but am aware that digital can be incredibly well measured and am prepared to assume that management are not lying. The reality of sales will prove this or otherwise.
2- Protecting the magic, but modernising food.
Like for like food sales were down 2.9%. I used to be a big fan of M&S food but have found the stores I have visited to be poorly stocked and long queues. The jury is very much out in this area. As a lot of the shortfall is attributed to reducing promotions it can presumably be recovered by increasing promotions if required.
3 – Transforming our leadership
M&S claims 2/3 of its most senior business leaders were brought in in the last 18 months. Not only does this get rid of the deadwood that got M&S into this mess, but it also brings in people who have seen the wheel in a previous employment. Remember my thesis is not that M&S gets good, it is simply that it stops being worse than its competitors. Whilst a number of the new appointments are from companies that I have no knowledge of a significant number of them are from well respected competitors where they will have seen how to retail properly.
4- Building greater accountability
This is very much an internal reorganisation. Neither how real, nor how effective is as yet clear.
5- Becoming a digital first retailer.
The company has begun to spend on its digital initiatives. Though these are pretty woeful and in terms of growth rates are awful. In their claims for improvement M&S cite a 9.1% growth rate in digital sales from Clothing and Home as a sign that they are taking action and gaining traction. I compare this to Wal Mart of the US that since it began to go digital to combat Amazon is routinely gaining 30% a quarter in digital.
I am historically an M&S customer and have used some of their historic out of store ecommerce systems before, such as their made to measure shirts. I am also a cardholder of their bank. I cannot honestly attest to having seen anything in terms of digital for months. Certainly nothing delivered with enough interest and flair for me to open and act on.
Again I would put this as an area where there has been more words than deeds, but I am aware that if you genuinely put your building blocks in place you can suddenly move the business from a trickle to a flood. So its positive that the area is identified, it is unclear whether anything meaningful is being done.
6-Creating a high end store estate for the future
Whilst the statement is true based on the stores I have visited over the last six months the delivery seems to be less high end and more pile it high and hope someone buys it. Stores are not laid to create a flow or to make it easy to find product if you are new to that store. Rails are ridiculously overstocked or empty. This suggests that there is insufficient staff to restock so they pile on when they are there and have trouble getting back to restock if customers turn up. However visual evidence is that there are a lot of staff, but perhaps not well allocated to tasks. This is very much an area where I feel the changes I have observed are so far negative.
7-Cost savings of £350m
The jury remains open. I am concerned that the cost savings they will claim in the future are less real costs saved as a reallocation of costs from operating costs into “adjusted costs”.
8-Modernising the supply chains
M&S also claim to be taking action on its woeful supply chain. If there is one high street store where you cannot trust the sizes or indeed the quality of the fit it is M&S. I was pleased to see this is widely recognised in the Company. At stores I tested product that in theory had the same size labels the sales vendor knew that this was only a broad reflection of size between different articles and brought complete sets for me to try on. The fact that this now seems to be widely understood means it can be corrected.
The company admits that stock levels are at 20 weeks which in this day and age is incompetent and availability remains unsatisfactory. Clearly there is much to do, but as almost every other retailer has done it already it should be possible for M&S to improve considerably.
9-Improve Profits in International
I have no real view on this but accept that with so much “Low hanging fruit” in the UK this could take time. Without the ability to see this process first hand I will look to the numbers to see what if any delivery occurs.
Bottom line M&S remains a large, profitable business. Management have identified many areas of weakness that can be improved, not by inspired leadership but by simply reaching the average standards of its peers. On paper work on this has begun, but evidence of any delivery is very limited.
I see the opportunity as being over a 3 year period relatively asymmetric. The company could continue to underperform and the shares continue to drift down. Alternatively the company could begin to deliver successes which would see not only a rerating but a rerating from a higher base point. The main exception to this scenario is should the dividend be cut the share price may fall considerably, but provided the cut was for the right reasons the rebound (investment in digital- where there is a real and effective digital plan) will simply be stronger.
I have bought a small position and will be watching future RNS’s for indicators as where to take the position. Where I see delivery I will add. If after 18 month I can see little delivery then I may reduce. I expect to wait for M&S to start delivering. But not forever.