Marks & Spencer (LSE: MKS) has been in the headlines since Tuesday after it announced an increase in sales and projected profits for 2021. This news boosted the retailer’s shares by almost 20% in a single day. Marks & Spencer has said that this is the result of an end to pandemic disruption and years of restructuring within the company. Does this mean now is the time to add it to my portfolio?
Key info
Marks & Spencer is a well-known brand within the UK. Considered to be one of the country’s high-end retailers, it boasts some of the best brand recognition within the British Isles. ‘Marks & Sparks’ is home to sweets like Percy Pigs and is considered by many as the supermarket for those who’ve ‘made it’.
Its share price currently trades at 235p, up from 131p this time last year. Most of these gains were made in August and November of this year.
Marks & Spencer vs Tesco
But M&S doesn’t come close to Tesco (LSE: TSCO) in terms of market cap or revenue. Tesco pulled in over £64bn in revenue in 2020 whereas M&S was only able to make £10bn. Tesco’s market cap is £21bn, while M&S’ is £4bn.
However, M&S is a much more diversified business than Tesco. Tesco makes the vast majority of its revenue through grocery sales, leaving other products and markets as an afterthought. M&S, by comparison, offers over 100 different brands of clothing, home appliances, and even banking services to its customers. This diversification gives the company lots of different revenue streams to pull from in the face of changing market tastes.
Online restructuring
Marks & Spencer has made a concerted effort over the past few years to restructure its business around it’s “46 flagship websites”. This does seem to have paid off as M&S’ international e-commerce sales were up 75% across 100 different countries and are, in large part, responsible for its sudden uptick in profit projections. However, the company continues to struggle with the effects of the pandemic and Brexit.
Challenges
The Marks & Spencer share price may have jumped on Wednesday, but unfortunately the price-to-earnings ratio (P/E ratio) gives something away about the health of the company. Yes, profits and revenues are up but the P/E ratio is, at time of writing, 187.26, meaning people are paying nearly 200 times what the company is actually earning per share. I blame this on projected profits exciting investors who are jumped in early on the hopes that the share price will continue to rise.
On top of that, M&S has been in the process of closing 11 of its stores in France, citing new costs incurred from doing business across the European Economic Community (EEC) border.
Marks & Spencer is not the only company struggling with the new status quo. Tesco has closed all of its stores in Finland. I can see this playing out two different ways though. Reduced international revenue will hurt, but cutting running costs is always good.
Conclusion
So, will I add Marks & Spencer to my portfolio? Probably not.
While I am pleased to see that it is increasing its revenue and cutting costs, Brexit presents an ongoing challenge to its international operations that will continue to hurt for years to come. If it continues to successfully pivot to online sales and maintains profitability I may re-consider. But for now it’s a no.
