Morningstar | Intense Competition Exposes M&S’ Lack of a Moat; Turnaround Will be Long and Uncertain
We initiate coverage of Marks & Spencer, the British multichannel retailer with stores across Europe, Asia, and the Middle East, with a GBX 229 fair value estimate, no-moat and negative trend ratings. Our estimate implies a forward fiscal 2021 price/adjusted earnings ratio of 14 times and enterprise value/EBITDA ratio of 6 times broadly in line with our United Kingdom grocery market coverage.Years of underperformance, underpinned by a fiercely competitive U.K. retail marketplace with price-led discounters and online retailers being the obvious winners, have radically changed the status quo of one of the oldest and most iconic British brands. When new management took over in 2016, a transformational plan was implemented that hasn’t yet yielded any tangible results, highlighting the depth of change that is needed.
On the positive side, M&S has all the right elements for the plan to yield positive results. A strong British brand with a long history, significant store footprint, an unpenetrated online opportunity and a reputation for one of the best quality own-brand product portfolios (especially in food), are the foundations that management should build on.
The group’s recent acquisition of a 50% stake in Ocado’s online grocery business (by creating a joint venture with Ocado Group) is promising and makes strategic sense for M&S given its negligible digital food share and inferior in-house online capabilities, and the market’s high single-digit midterm growth prospects. We think the joint venture will enable M&S to profitably increase its specialty food-product sales through Ocado’s technology platform, while at the same time facilitate its transition to a more fully-fledged supermarket offering, crucial for online retail economics.
Marks and Spencer Group is the holding company of the Marks & Spencer Group of companies. As a retailer, Co. provided its own-brand food, clothing and home products in its 1,433 stores worldwide and online as of Apr 1 2017. As of the same date, Co. sold food through 942 U.K. stores, including 253 owned and 383 franchise Simply Food stores; and own-brand clothing and homeware through 343 full-line stores, Outlets and its M&S.com website. Co. focuses on contemporary style and wardrobe essentials, and provides Womenswear, Lingerie and Menswear. Co. exports M&S Clothing & Home and Food around the world, with stores across Europe, Asia and the Middle East.
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