Why I’m ignoring the Marks & Spencer share price and going for this recovering retailer instead

This retailer looks as if it has brighter prospects than Marks and Spencer Group plc (LON: MKS) to me.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Marks & Spencer Group’s (LSE: MKS) share price has been sliding for around three years, and now the stock trades 50% or so below its May 2015 level. Over that period, earnings and operating cash flow have been generally falling and the valuation has compressed to match reduced investor expectations.

The largely bricks-and-mortar-based retailer is leaning far forward into headwinds that ravage the sector. The onslaught from internet and discount retailers is relentless. They are disrupting the traditional high-street retailing businesses that many of us are used to – make no mistake about that.

Disappearing retailers

Names such as Woolworths and BHS (in its high street form) are long gone. Others, such as Debenhams, appear to be teetering on the brink. But what will become of good old M&S? The company has been struggling for years, never quite managing to pick up the mojo it once clasped so firmly. One good indicator of a firm’s performance and its outlook is to examine the directors’ decisions surrounding the dividend. It’s not good news. The dividend is more-or-less stuck in the mud with City analysts predicting the 2020 payment to be hardly any bigger than the 2015 one.

In the long run, my guess is that we won’t see M&S go bust because it has such a trusted reputation and brand image to exploit, but what we are likely to see is a managed decline and shrinking of the business. If the firm could change to embrace the new world order in retailing, surely it would have done so in a meaningful way by now. I’m sure there will be mini-recoveries along the way, but I reckon the long-term operational and share-price trend is down, and that’s not a good basis for an investment, so I’m looking at N Brown Group (LSE: BWNG) instead.

Moving with the times

I like the way the fashion retailer, which targets the plus-size and more mature customer markets, has migrated its sales from catalogue shopping over to internet shopping during the last few years. The company is moving with the times, and today’s full-year results reveal that 73% of orders arrive via the firm’s websites, with 76% of all traffic originating from mobile devices. N Brown is plugged into the modern world.

Yet the trading backdrop has been “challenging.” Nevertheless, the company managed to grow its revenue 3.9% compared to the year before and adjusted earnings per share moved 4% higher. The directors held the full-year dividend flat, signalling a cautious outlook. City analysts following the firm expect earnings to decline 1% for the year to February 2019 and to rise 4% the year after that.

N Brown earns its profits both from product retailing and from providing credit for customers to finance their new goods. The year saw “strong performance” in its financial services operation, driven by continued improvement in the quality of the loan book, together with a reduction in arrears as a result of minimum payment changes.” 

Meanwhile, it’s hard to make a case for the shares being expensive. Today’s 205p puts the forward P/E ratio for the trading year to February 2020 at just below nine, and the forward dividend yield runs a little over seven. My guess is that N Brown will emerge as one of the retail winners over the years to come.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »