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.
In November 2018 I wrote a blog post, (based on the September 2018 ½ year results), suggesting that perhaps in some areas we were seeing green shoots. I accepted at the time that it would take time to turn the supertanker that is M&S.
The reality is that M&S’s problems have been stated time and again by different managements over a number of years. Clothing, food, e-commerce, digital knowledge, buying, store estate. Yet none of them have been able to arrest the decline. I had hopes given the quality of this management team, but it is beginning to look as though the Buffett adage may once again prove true. “When a business with a bad reputation, meets a management with a good reputation, it is invariably the business that leaves with its reputation intact.”
Using the same M&S development areas as I did in November;
1-Reshaping the ranges and customer profile in Clothing and Home
The store closure programme continues. Like for like revenue was down 1.6% with total Clothing and Home being down 3.6%.
Q4 was a disaster with supply issues and running out of the few lines that people actually wanted. Buyers are described as lacking confidence and the supply chain as slow.
Management report that there is still too wide a range and too many options. This is after 24 months+ of this new initiative.
Some years ago the sports good manufacturer Salomon was in trouble. It took the new CEO 48 hours to decide on what they would continue to make and sell, to communicate this throughout the organisation, and all their sites and to come out with the sales price list for what they were continuing with. Now this is incredibly fast and I think it has become a Harvard case study. But this is retailing 101 and for it to still be an issue 3 months after the initiative started let alone 24 is woeful.
Q4’s lack of product undoubtedly impacted results. These supply chain issues are not easy to rectify, but they are not new to the industry. There are ways to either manage or remove them, but there are bullets to be bitten and should M&S not begin to demonstrate that they can address them it would suggest that management will not be up to the job.
As an aside a couple of ways to manage the process would be to operate a “When its gone its gone” model. But you need to push that through the system and into your marketing. But this requires a buying team and all the parts thereafter to be continually looking for and introducing the new product. Rather than buy for the next season and then rest for a month before you start looking for the next season. Moving to a lean faster fashion model. Alternatively you can operate a stock in the supply chain model. You work with people who can turn out repeats quickly. Maybe this requires giving up some margin, or better buying, or better supplier factory accreditation, maybe even funding at different levels for stock in the system. It also requires buyers to have some confidence in their decisions. And some acceptance that mistakes will be made within parameters.
Having the wrong product, in the wrong size at the wrong location continues to impact margins as clearing it requires discounts.
Stores continue to look old and tired and given their age many are not particularly designed for the modern retail environment. A new brand format will be trialled next year. Under Project Fuse there will be more willingness to return product from where it is not selling to depots for distribution to where it will. Methinks it might be better to not send it to the wrong store in the first place.
2- Protecting the magic, but modernising food.
Like for like food sales were down 2.3%. This is up slightly from being down 2.9% at the half year. I do personally feel that M&S still has a significant quality differential, having had a number of the best of Tesco and Sainsbury’s ranges. Some of which were virtually inedible. Note to Tesco’s adding salt does not improve everything. However M&S is still very poor as to store layout. I have visited a number of stores in the last few months and over half of them finding sandwiches at lunchtime is a battle. They are not positioned to allow quick in and out by the customer or too easily find. I just use sandwiches as an item. Anyone who can quickly find a food item in a store they have not previously visited is truly blessed. (That being said the clothing layout is no better).
The management admit that in order to limit the sales decrease margin has had to be given up, though this is not specifically clarified.
Management also admit that food waste levels are amongst the highest in the industry and availability is still not good.
There is reference to Project Fuse demonstrating that significant improvements can be made and an improved working relationship with GIST the logistics partner.
3 – Transforming our leadership
Since the ½ year there seems to be little new to report on this. A few changes in responsibilities and authority are mentioned but none of these will set the business alight. Though this may suggest that the IT systems are even weaker than I realised. The new “initiative” seems to be more in store decision making and more information to the store managers. Based on what I have seen at other grocers what M&S is describing as new was available 20 years ago.
As I said in November moving M&S does take time. But I am now concerned that the problem is much deeper than management first indicated and that some of the key and quickly actionable issues (number of SKU’s, competent confident buyers) that I would have expected to be long gone are still prevalent.
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 9.8% 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. (This is almost word for word what I wrote in November and the fact that it is repeatable does not convince me that much is happening). Equally my wife has and M&S credit card. But must also produce a Sparks card for points. Adding till time both for her, the staff and other customers. Could the databases be any less joined up.
6-Creating a high end store estate for the future
This is an area that will take time. I don’t think anything useful was added to what has been previously said at the half year. In part this means closing stores and opening new ones. But much of this also relates to how stores are laid out. M&S has clearly a lot of work to do in modernising stores out, but I haven't been into one recently that I thought was well laid out. I don't think they spend as much thought on laying out sections as you see in Primark.
7-Cost savings of £350m
Management claim cost savings of £100m to date.
8-Modernising the supply chains
This used to be a separate area but seems to have been subsumed into various other initiatives. So far it is not clear that much real progress has been made.
Food wastage is still high, the wrong products are in the wrong place, popular items cannot be replaced to meet demand. Aside from that all good.
9-Improve Profits in International
International revenue declined 13.4% on a constant currency basis.
10 – Ocado
The new initiative is Ocado. M&S is creating a JV with Ocado to help it become a digital grocer. In return for the use of Ocado’s systems, UK infrastructure and UK customers it is paying Ocado up to £750m. By doing this M&S will get access to the low margin delivery market but not the IP of Ocado which is what fans of Ocado have historically used to validate investing in it. In reality M&S will own half of a competent low margin grocery delivery business. Paying this price is either a sign of real desperation or M&S has placed a very high value on initiatives it hopes to drive through its business using the delivery service as a lever. The success of which have yet to be assured.
Buying Ocado does remove M&S having to sort out its own delivery service. Though given the margins in delivery does M&S actually need home delivery? It can be expected to increase revenue but M&S needs profits.
As readers can realise I am underwhelmed by the Ocado purchase and have yet to see anything that provides a convincing rationale.
In order to fund the Ocado purchase the company is having a rights issue and reducing the dividend. Given the amount involved this seems to be necessary. Even without Ocado cutting the dividend may have been necessary and perfectly correct to invest in the business. But a rights issue for a dubious purchase does not impress.
Actual Results
Let me start by saying that M&S is a big fan of “adjusting” items. There are many valid reasons to adjust and many good companies quite properly give out adjusted numbers so their shareholders can see what is happening in the business with one off, large numbers properly explained and adjusted.
Almost none of this applies to M&S and the adjustments by and large occurred last year, this year and will occur next year and the year after. Possibly even after that. The main rationale seems to be that management decided on them, they are large and they are costs that they would like to pretend are not their fault.
Managements adjustments total £438.6m of which £20.5 are IMHO legitimate as genuine adjustments. (There was a GMP equalisation), which is genuinely one off and outside the normal course of business. As I have said before just look at Next plc for a company doing almost exactly what M&S is doing that does not need to fill its accounts with adjustments.
The GAAP numbers for M&S are;
2019 2018 %
£m £m Change
Revenue 10,377.3 10,698.2 -3
Gross Profit 3,471.0 3,575.4 -3
Profit Before Tax 84.6 66.8 26.6
Profit After Tax 37.3 29.1 28.2
Clearly both the PBT and PAT are diminutive compared to the turnover, gross profit, adjustments the company wants to make, or indeed the investment in the Ocado JV. As such to my mind they are only really a record that the company can make profits, but they could easily be destroyed by continued poor performance in any key operating area.
The only point I would make on these is that nothing in them suggests that the company is on its way to future success.
My thesis that all M&S needs to do to be a lot better is simply to raise itself to the level of its competitors. Its size and scope, and even brandname allows it to recruit competent senior staff and provided they are properly empowered real change can come.
This thesis still applies, though whilst in November I thought some green shoots might be developing these results with its litany of woe and value destruction in Q4 suggest there are more cracks than green shoots.
I am still holding but have moved M&S in my ratings from looking for the green shoots with an intention to add, to looking for more failures with an intention to sell if they are seen.