Priority to deliver
After three years of heavy IT and logistical investment and strategic realignment, the building blocks appear in place for M&S (OTC:MAKSF) to execute on its multi-channel general merchandise (GM) offering, to compliment the ongoing success of its food and international divisions. Given the size and nature of GM, this will be an evolution not a revolution, but early signs are encouraging. At 12.9x FY15 P/E, it trades at an approximatec 20% discount to its peers.
Continuing importance of the store
Following on from our retail sector report challenging the Internet premium and arguing the importance of a well-invested store base to a successful multi-channel retail strategy, M&S has completed phase one of a new store layout concept and is rolling out phase two. In addition, 80% of the UK population is within a 45-minute drive of a regional/flagship store, and 93% of the UK population is within a 30-minute drive of a store, giving M&S the ability to leverage the benefit of a clear consumer preference for click and collect, evidenced by 55% of online sales now being collected in store. In our view, this gives it a strategic advantage over retailers with a less dense store network and pure e-tailers.
Execution is key
After three years of heavy IT investment and a total reorganization of its supply chain and distribution, M&S now has the building blocks in place to operate more effectively both front and back of house. Execution risk remains high, with a number of major projects coming on stream simultaneously; however, management’s guidance for GM gross margin +100bp in FY15, regaining much of the 110bp slide in FY14, reflects a measure of internal confidence.
Brand momentum turning?
There has been much commentary in recent years that M&S has lost its brand identity and alienated its consumer base. However, the analysis in our retail sector report, cross-referencing a variety of brand ranking methodologies, combined with the fact that 20 million people shop with M&S every week, suggests differently to us. While continued improvements need to be made, especially within the core GM business, we believe a refocus on the core values of ‘quality and style’ in conjunction with an improved in-store and e-commerce experience is starting to show some encouraging early results, with positive like-for-like sales reported for Q414 and continuing in-store in Q115. This is not a ‘high fashion’ business, thus we favour this step-by-step progress, rather than a dramatic turnaround in one or two seasons.
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