Should You Buy This Soaring Former FTSE 100 Stock In January?

Investing in the British retail sector is exceptionally-risky today. That is unless one buys UK shares with significant e-commerce exposure. Companies with large store estates look set to be smashed by more Covid-19 lockdowns (the current national clampdown is likely to persist until March at least). The prospect of a long downturn in consumer confidence as the economy tanks provides another reason to be concerned.

All this means that I won’t be buying Marks & Spencer shares any time soon. In fact, I’m quite worried about what the British shopping institution’s Christmas update will reveal this coming Friday (January 8th). Latest financials in November showed revenues tank almost 16% in the first fiscal half as Covid-19 trading restrictions kicked in.

Under Pressure

The coronavirus outbreak has devastated the retailer’s top and bottom lines, sure. But many of Marks & Spencer’s problems are long in the tooth.

Delayed entry into online retailing has allowed its competitors to steal a march on it in recent years. Its e-commerce proposition continues to lag behind those of the other mid-tier clothing retailers like Next too. The ongoing Covid-19 crisis, where having a customer-friendly website and decent online supply chain is king, has exacerbated the issue. But the problem was already a significant revenues-basher.

On top of this, Marks and Spencer’s clothing lines still attract accusations of being dated and overpriced. Tanking womenswear sales is a significant reason why annual earnings have fallen every year for almost half a decade. And it’s why the retailer has vowed again in recent months to accelerate the reshaping of its Clothing & Home division.

This recent announcement has more than a touch of déjà vu about it, though. M&S has long struggled to shift its female fashions despite numerous relaunches and a steady stream of executive appointments. The sacking of former clothing boss Jill McDonald in 2019 after just two years at the helm illustrates how difficult this ship is to turn around.

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Food Division

It’s certain that Marks & Spencer’s food operations provides a better reason to be optimistic than its fashion business. There’s no doubting the quality or the popularity of M&S’s edible products. Its tie-up with Ocado back in 2019 gives it a critical foothold in the fast-growing online grocery segment too.

That said, I think Marks and Spencer might struggle to keep the pace in this segment too. Competition here is huge, from both the established operators like Tesco and Sainasbury’s along with the new discount chains like Aldi and Lidl. Supermarkets across the spectrum have all invested heavily in their premium lines to grab a slice of this lucrative section of the market.

Don’t Bet On A Comeback

City analysts reckon Marks & Spencer will endure a 65% fall in annual earnings in this fiscal year (to March 2021). They reckon, though, that the retailer will bounce back strongly in financial 2022. A 128% bottom-line rise is forecasted.

Such a bold prediction is at huge risk of falling flat, though. Even if Marks & Spencer sorts its troubled clothing unit out, it still faces colossal problems as the Covid-19 crisis drags on and competition in the fierce fashion sector worsens. Besides, a forward price-to-earnings (P/E) ratio of 26 times fails to reflect the scale of these issues. I won’t be buying this former FTSE 100 share any time soon.

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