UK retailer Marks and Spencer (MKS) has been struggling with falling revenues in recent years, with the Covid-19 pandemic only exacerbating its problems. The share price has dropped by around 66 per cent in the past five years. However, the stock has bounced up from its lows, gaining 61 per cent between late October and early December in response to progress in the development of vaccines to tackle the spread of the virus.
Given the volatility in the share price, investors are asking: “Should I sell my Marks and Spencer shares or hold on for a potential recovery?”
To answer this question, in this article, we review the company’s recent performance and the analyst outlook for the stock.
The good, the bad and the ugly: the UK retail industry today
The retail industry in the UK has been hit hard by the Covid-19 pandemic, with data from the British Retail Consortium and KPMG showing that in-store sales of non-food items in 2020 declined by 24 per cent from 2019.
Helen Dickinson OBE, chief executive of the British Retail Consortium, said: “Covid has led to 2020 being the worst year on record for retail sales growth.”
Dickinson suggested: “To avoid the unnecessary loss of shops and jobs, the Government should announce an extension to business rates relief for the worst-affected businesses as soon as possible.”
In the meantime, with consumers staying home during UK lockdowns, food sales were one of the few areas of increase. Total food spending increased by 5.4 per cent during 2020, according to the data. That has been a bright spot for UK supermarket chains, as Sainsbury’s (SBRY) and Tesco (TSCO) reported sales growth of around 8.5 per cent for the third quarter and strong sales over the Christmas period. Sainsbury’s also reported a 0.4 per cent increase in clothing sales.
However, unlike some of its competitors, Marks and Spencer reported a decline in sales revenues, as it continues to face challenges in turning around heavy losses in its clothing division.
How Marks and Spencer’s Q3 results disappointed investors
M&S reported an 8.2 per cent year-on-year decline in its total UK revenue for the third quarter, as a 25.1 per cent drop in its clothing and home division offset a 2.2 per cent rise in food sales.
The company’s January 8 trading statement said: “In Clothing & Home good progress in repositioning ranges and shape of buy was concealed by the continuing restrictions and demand distortions: revenue decreased 25.1 per cent reflecting an in-store sales decline of 46.5 per cent, partly offset by strong online sales growth of 47.5 per cent.”
“The sales mix remained heavily biased to Covid influenced products such as sleepwear and leisurewear.”
M&S chief executive Steve Rowe commented: “Near-term trading remains very challenging but we are continuing to accelerate change under our Never the Same Again programme to ensure the business emerges from the pandemic in a very different shape.”
Marks and Spencer said on January 11 that it has acquired the brand and stock of collapsed UK clothing retailer Jaeger from administration, as part of its strategy to sell third-party brands to refresh the clothing division.
The company’s international revenue decreased by 10.4 per cent during the third quarter in line with changing Covid-19 restrictions around the world.
A sharp rise in Covid-19 infections in the UK and elsewhere has prompted a new round of lockdowns, which will continue to affect the company’s performance in the first quarter of 2021.
The company noted: “The announcement of an effective UK wide lockdown, potentially enduring until Easter will impact store sales and we are continuing to actively manage our Clothing & Home stock and our store cost base accordingly.”
The M&S share price slipped back from £1.41 to £1.38 in response to the update.
The stock had dropped to 92 pence per share in March from £2.14 at the start of 2020 and remained low over the summer. The stock was trading below 89 pence in late October, but climbed by 61 per cent to reach £1.43 in December, its highest level since the stock market selloff.
The share price has been in a broader decline since 2015, falling from the £5.50 per share level.
Like many UK retailers, Marks and Spencer has also faced uncertainty surrounding the impact of Brexit on its business in the UK and Europe. The UK and EU came to a last-minute trade deal on December 24.
The company said in its trading update: “The free trade agreement with the EU means we will not incur tariffs on our core UK sales. However potential tariffs on part of our range exported to the EU, together with very complex administrative processes, will significantly impact our businesses in Ireland, the Czech Republic and our franchise business in France which we are actively working to mitigate.”
With the business continuing to face challenges, what is the outlook for the stock in 2021 based on Marks and Spencer share forecast ratings from analysts? Should you consider a long-term investment or a short-term trade?
Marks and Spencer share price forecast for 2021: is the stock ready to hit new bottoms?
The analyst outlook suggests the M&S share price will remain under pressure. The average 12-month price target from 15 analysts that have issued an M&S share price forecast is £1.32 per share, according to MarketBeat, with a low estimate of £1.00 per share and a high of £1.70 per share. The average price would indicate a slip back from the recent £1.39-1.40 per share level.
“Lockdown 3.0 will negatively impact Q4 FY02021 trading,” commented analysts at Shore Capital, “but the group is progressing at pace, we note a clean stock position and the successful £300m bond issue; year-end net debt should be down.”
WalletInvestor indicates that the share price will continue to fall. In its Marks and Spencer share price prediction, the stock is expected to average £1.31 per share in February and drop to 79 pence per share by December. If the share price continues to decline at the current pace it would reach zero by early 2023, emphasising the importance of a turnaround in the performance of the business.
Have you decided what to do with Marks and Spencer shares – buy or sell? Even if the share price continues to decline, you can still try to profit from the stock’s fluctuations.