Marks & Spencer, Royal Mail bank on strategy shifts

Long road for M&S

Marks & Spencer shares dropped on Wednesday after another poor scorecard. The retailer is disappointing on several fronts and the doubts about the turnaround remain. It’s also announced a £600m rights issue for its joint venture with Ocado. I’d still view the deal as an expensive entry into a sector – online groceries – that doesn’t make any money. M&S basket sizes are tiny (c£14) so they need people to change their habits entirely and think M&S is the place for their big weekly shop, which they won’t. It’s better than standing still but no silver bullet. Exposure to the UK high street is a major drag that won’t get any easier.

The numbers are still heading in the wrong direction. Underlying profits were down 10%, on revenues that fell 3%. Food revenue declined 0.6%, with like-for-like revenue down 2.3%. Clothing & Home revenue down 3.6%, with like-for-like revenue down 1.6%. So store closures are a factor, but the drop in LFL sales is the real worry here. Really LFLs should be improving as customers transfer sales to surviving stores. Gross margin is better – up 20bps.

The cost of the transformation programme is high, such that it needs to deliver or the company’s financial position would start to come under greater scrutiny, albeit net debt has fallen to £1.55bn from £1.83bn. Exceptional costs scrubbed £439m from underlying profits to reduce these to just £84.6. M&S added to last year’s £320m hit from store closures by booking a further £222m charge. These costs are not insignificant. Capex is meanwhile rising.”

Royal Mail, too little too late? 

Royal Mail is launching some eye-catching new services. These are certainly the type of thing that will make it more fit for the 21^st century. But it may be too little, too late.  

Parcel post boxes and a second daily parcel delivery service for next-day orders are great improvements and help it compete with more nimble rivals. You just wonder why it’s taken so long to get to this point. Amazon has offered Prime for many years; Royal Mail has rested on its laurels for too long.  

And it’s requiring sizeable investment. A whopping £1.8bn is being spent over 5 years. A dividend cut is an absolute pre-requisite. Pay-outs are being slashed to 15p a share from 25p share this year. Investors hungry for yield may be disappointed, but strategically it is absolutely the right move. And any surplus free cash will be directed to shareholders, so 15p is just the base. Fellow monopoly incumbent BT would be wise to take notice. 

Investors worried about the divi cut can cut and run. Those with a longer-term outlook are happier with the bold new direction. Shares have rallied 6% this morning, showing those with a longer view are greater in number. FY results show more of the same we have become used to over recent years with strong parcel growth offsetting declines in letter volumes. Profits before transformation costs were down by about quarter though. Today’s strategy update means going all in on parcels – it’s about time.