Marks & Spencer Lacks Luster

LONDON -- This morning, iconic retailer Marks & Spencer  (ISE: MKS.L) released its full-year results. Alas, despite rising sales and steady earnings, M&S failed to lift its dividend payout. Even so, its shares offer value, especially to dividend-seekers.

M&S = margins and sales
In the fiscal year ending March 31, 2012, group sales rose 2% to more than 9.9 billion pounds. This was largely thanks to U.K. sales rising 1.5%, driven by food sales, up 3.9%, and clothing sales, up 0.2%. However, in this new age of austerity, U.K. home sales tumbled by 10%.

As for like-for-like sales -- the retail industry's preferred growth measure -- these rose a mere 0.3% in the group's home market. While LFL food sales rose 2.1%, sales of general merchandise dipped 1.8%.

Meanwhile, M&S's multichannel sales -- from Internet, telephone, and mobile transactions -- climbed by an impressive 18% to 559 million pounds, while international sales rose by nearly 6%. What's more, the FTSE 100 firm managed to maintain its market shares of 11.7% in clothing and 3.8% in food and drink.

In other words, this is a now-familiar tale of weak U.K. sales offset by stronger growth overseas. Indeed, international sales climbed about 1.07 billion pounds in FY 2012, which is almost 11% of the total.

However, like many retailers, M&S has had to discount prices in order to move goods. As a result, its U.K. gross margin dropped to 40.8% from 41.1%, down 30 basis points. Also, U.K. operating costs rose by 1.5% to nearly 3 billion pounds in the year, largely due to inflationary pressures and a 13% increase in marketing spending.

No dividend hike, but lower debt
At M&S, underlying profit before tax (which excludes one-off charges and gains) dipped 1% to 706 million pounds, which is pretty good in this weak retail environment. However, unadjusted profit before tax dropped 16% to 658 million pounds.

Thus, while underlying earnings per share crept up from 34.8 pence to 34.9 pence, basic EPS dived 16% to 32.5 pence. Consequently, the full-year dividend was held at 17 pence per share, thanks to a final dividend of 10.8 pence.

Encouragingly, net debt dropped 2% from 1.9 billion pounds a year earlier to 1.86 billion pounds.

M&S chief executive Marc Bolland said of these results:

Marks & Spencer performed well in a challenging economic environment, growing group sales by 2% and holding market share. We also made good progress with our strategic plans. We managed the business prudently with tight control of costs and capital investment, delivering earnings in line with last year, and substantial efficiency savings in our capital investment plans.

Slow and steady growth
In FY 2012, M&S opened 37 new overseas stores, but it plans to accelerate this to 100 openings per year. It also launched websites in France and the Republic of Ireland, and it aims to have 10 websites up and running by the end of the year.

Even so, the big disappointment today will be the failure of M&S to raise its dividend. In fact, at 17 pence, it is lower than the payout in FY 2007, as my table shows:

Fiscal Year

Dividend (pence)



As you can see, M&S paid a dividend of 14 pence per share in 2006, and six years later this payout stands at 17 pence. That's a rise of 21% in six years, which amounts to compound growth of just 3.3% a year.

As I write, M&S shares trade at 339.6 pence -- barely changed on the day -- which values the company at more than 5.4 billion pounds. At this price, the shares trade on a forward price-to-earnings ratio of 9.6 and offer a prospective dividend yield of 5.3%, covered twice.

On balance -- and given that Marks & Spencer is growing slowly at home and strongly abroad -- I think these fundamentals suggest there is value in M&S shares. Therefore, I have added the retailer to my personal watchlist of potential bargain buys.

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At the time this article was published Cliff does not own shares in Marks & Spencer. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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