Marks and Spencer (OTCQX:MAKSF) (OTCQX:MAKSY) is a fabled British retailer whose shares have been underperforming the market for a long time. It has traded this year at lows not seen since the 1980s but has some hallmarks of being a value trap. Here, I present a SWOT analysis of the state of play for the retailer as British high streets start to reopen.
Strengths
Brand recognition – Historically, Marks and Spencer was a well-liked brand in the U.K. which was associated with quality at an affordable price. Even now, over one quarter of British underwear is bought at the shop. The brand was a byword for product quality, so much so that it did not bother to carry any branded products as its own brand was sufficient to attract consumers. In some categories, this was unsurprising, but, for example, the fact that the brand felt no need to carry Coca-Cola (NYSE:KO) as shoppers would buy its own alternative instead was a sign of how confident management was in the brand.
The brand value has declined over the years but does persist to some extent. There are also international markets, such as in Hong Kong and the Middle East, where the Marks and Spencer brand continues to exert a considerable pull.
Weaknesses
Financial Decline – The company maintains significant assets that could be realized for value, but at its core, this is a business with a sizeable debt burden and income far below what it needs to remove it over the long term. Here’s a snapshot to illustrate:
Source: company annual report 2020
As an investor, what you are looking at here is a mature business in a mature market that is rapidly evolving, on thin margins and a significant debt load to pay down, likely before other problems emerge down the line as retail changes further.
International Distraction – For decades, Marks has struggled with how to capitalize on international opportunities. A mixture of British expats and foreigners who appreciate its quality and/or range means that there has long been an opportunity for the company to do well overseas. Indeed, to the shame of Paris’ main airport, I’d say the best value quality food sold at Charles de Gaulle is, ironically, in the branch of this British shop.
However, despite its proven international appeal, the company has never cracked a winning model for international expansion, as its closure in various European countries and expensive abortive entry to the Chinese market a decade ago showed. These international forays have distracted management time and often money at a time when the core U.K. business has really needed work.
Opportunities
Retail financial services – Marks and Spencer is a trusted name with a historically decent well-heeled clientele, so its financial services arm is a bright spot. Its bank – operated by HSBC (HSBC) – offers a range of banking services, far beyond just the traditional storecard. Not only does the brand name work well to reassure, but this also helps the company understand its customer base better, and its physical store estate if used strategically could be an asset when bank chains such as Barclays (BCS) and Lloyds (LYG, OTCPK:LLDTF, OTC:LLYDF) continue to cut their own physical estate. The bank is a small but consistent profitable contributor at the moment, with room to grow.
Source: company annual report 2020
Although dated, a publicly available brand perception study by YouGov showed part of the long-term decline in brand perception which has plagued Marks and Spencer.
Source: YouGov
The reason I see this as the company’s existential threat is that in retail, irrelevance is ultimately fatal, seen in so many cases, of which Woolworths is a relevant example in the U.K. market. Marks and Spencer has been positioned in opposition to various recent trends, from fast fashion to non-high street locations and online shopping to discount retail. It shouldn’t be all things to all people but to survive let alone recover, it needs at least to be something to some people. Its brand has largely stood still despite the company’s growing awareness of these challenges, which suggests that the issue now (unlike the more arrogant Marks of the 1990s, say) is not that it won’t change, but that it can’t change. The closure of 110 stores, some open for a century or more, reduces visibility but without a viable alternative to maintain visibility or build relevance. The company is thus slowly but surely alienating its customer base.
Online retail continues as a threat. Amazon (NASDAQ:AMZN) has already eaten a fair bit of Marks’ lunch over the years, but, on the clothing side of the business, there are a plethora of online retailers who have slicker, more convenient operations from a customer’s perspective than Marks. The company’s forays into online retail have always felt tactical more than strategic, as with its recent limited food tie-up with delivery company Deliveroo. It has announced that online grocery platform Ocado (OTCPK:OCDGF, OTCPK:OCDDY) will replace Waitrose products with Marks and Spencer ones from September but even that has the makings of failure before it has begun – Marks funded it by diluting shareholders and cutting its dividend, while the platform will continue to offer own label and branded products beside Marks and Spencer ones. Meanwhile, Marks will waste more years confusing what is essentially an outsourced distribution deal with learning about online retail for itself. For Waitrose with its geographically concentrated footprint, the Ocado tie up offered access to swathes of customers in previously unserved areas – this won’t be true for Marks and Spencer, with its much broader national footprint.
Conclusion: Marks and Spencer is on a Long, Slow Path to Nowhere
John Kingham’s article Marks and Spencer’s Shares May Disappoint Investors outlined similar problems five years ago this week when the shares were at 565p. Since then, they have fallen to 106p – a fall of over eighty percent. The market hasn’t lied.
At best, the Ocado deal will buy Marks and Spencer a little more time to sort out its basic identity crisis and proposition. More likely, it will, ultimately, distract from that core challenge. The store estate is problematic, but if in a radical move it retreats just to being a food brand with outsourced manufacturing, its reason to exist becomes flimsier.
It has a lot of debt to pay down, its income is weak and its share price has lately been lower than since Baroness Thatcher was in office. Marks and Spencer shares, long term, look set to decline further. Therefore, at this point, even if it means taking a loss, I would sell. Five to ten years from now, the shares will be even closer to zero.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
