M&S may offer share buyback tonic for investor unease

Thu Feb 13, 2014 11:18am EST

* M&S nearing end of 3-year, 2.3 bln stg investment plan

* CEO Bolland under pressure to show strategic plan working

* Underlying general merchandise sales down for past 10 qtrs

* Co due to give Q4 update in April, FY results on May 20

* Investors look for operational headway and/or cash return

By James Davey

LONDON, Feb 13 (Reuters) - Dogged for years by a poor performance in clothing, British retailer Marks & Spencer Plc could soon unveil plans for a share buyback to help reassure investors that a costly revamp is about to pay off.

Marc Bolland, chief executive since May 2010, has reported 10 straight quarters of declining underlying sales in the general merchandise division, which includes clothing, ramping up pressure on the Dutchman to show his strategic plans are working.

Bolland, who is nearing the end of a three-year, 2.3 billion pounds ($3.8 billion) plan to address decades of under-investment, bought some time at Christmas when a strong showing from the firm's food business offset a weak clothing performance and lifted its shares.

Within clothing, Bolland said the group's key womenswear business was showing signs of improvement under the management of a new team, though he blamed fiercely competitive rivals and an unseasonably warm October for a fall in overall sales.

The shares have clung to their post-Christmas gains - up 13 percent so far this year - but are still valued at 13.9 times forward-year earnings expectations, a discount to the 17.4 times multiple for the UK sector as a whole, according to Reuters data.

Some investors argue Bolland needs to dole out extra rewards to keep them on side.

M&S's fourth-quarter trading update on April 10 and final results on May 20, when it is expected to post a third straight fall in annual profit and give guidance for the new financial year, could prove critical.

"When they get to May, they're going to have to either show that they are definitely making operational headway, starting to get some like-for-like sales growth on the general merchandise side, or taking more market share," said a senior manager at one of M&S's 20-biggest shareholders.

"Or they're going to need something more strategic to keep people happy," the investor said, pointing to the prospect of a return of cash by way of a share buyback programme.

M&S said it would give any guidance along with its yearly results and declined further comment.

POT OF MONEY

May marks the end of Bolland's initial three-year drive to transform M&S into an international, "multi-channel" retailer, connecting with customers through stores, the Internet and mobile devices.

The group has spent heavily on revamping its clothing operation, redesigning stores and overhauling logistics and IT to complement a new web platform set to go live this spring.

Having peaked at 821 million pounds in 2012-13, annual capital expenditure will fall to about 550 million from 2014-15, giving M&S a material improvement in free cash flow, which Reuters data shows has fallen for the past three years to stand at 311 million pounds in 2013.

"Clearly if you are spending a couple of hundred million pounds less on capex, then that is a pot of money that potentially you could do something else with it," said the investor.

Such a payout may look relatively modest in the context of a company with a stock market value of 7.9 billion pounds, but could mount up if repeated over time.

Analyst Kate Calvert at brokerage Investec reckons M&S will generate about 100 million pounds of spare cash per annum from the 2014-15 year, while Exane BNP Paribas analyst Ben Spruntulis reckons a share buyback would add 3 percent to annual earnings per share in the 2015-16 and 2016-17 years.

Another of M&S's top 40 investors also said returning to a more normal rate of capex after the period of big spend on infrastructure has raised the prospect of cash returns.

Elsewhere there are some grounds for Bolland to be more optimistic.

The third-quarter trading update did reveal M&S had clawed back a little market share in womenswear for the first time in three years. And with spring/summer ranges well received by the fashion press late last year, some analysts are forecasting a long-awaited return to like-for-like sales growth in general merchandise in the fourth quarter.

Bolland also has high hopes for M&S's new web platform, expected to launch in May, as well as its huge new e-commerce distribution centre at Castle Donington, central England, moving to full capacity, which he expects to build on already above-market growth in online sales.

The company's international growth should also accelerate, with nearly 150 store openings in the pipeline, while it should also benefit from Britain's economic recovery and from wages finally starting to rise faster than inflation.

Ultimately it is underlying trends in clothing which are likely to be the arbiters of Bolland's record.

"One would just like to see more impressive market share momentum," the second investor said.

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