Shares of Marks & Spencer (LSE: MKS) jumped over 5% in early trading this morning after the company released a Q4 update with performance ahead of market expectations.
The iconic high-street retailer reported total sales up 1.9%, comprising: Food (+3.7%), General Merchandise (+1.3%), M&S.com (+13.8%) and only International sales showing a decline (-3.8% at constant currency; -6.3% at actual exchange rates). The international performance was largely out of the companys hands: in addition to the impact of a weakening Euro, macro issues hurt franchise partnerships in Russia, Ukraine and Turkey.
The really big positive in the results was the performance of general merchandise, where positive sales, including a 0.7% rise in like-for-likes, ended 14 consecutive quarters of declines. In particular, M&S seems to have got its fashion offer right back on track, which means clothing, footwear and homewares are no longer a drag on the companys continuing strong performance in food.
It happens that just as M&S has got both its major divisions firing, J Sainsbury (LSE: SBRY), which had previously been in that position, has now seen its food sales stall and go into reverse.
Is it now time to invest in M&S and even to sell Sainsburys in order to do so?
Lets have a look at some numbers. The table below shows earnings growth for the two companies over the last four years, and analyst estimates (e) for the next three.
2011 |
2012 |
2013 |
2014 |
2015 (e) |
2016 (e) |
2017 (e) |
|
M&S |
+5% |
0% |
-9% |
+1% |
+1% |
+8% |
+8% |
Sainsburys |
+11% |
+6% |
+10% |
+6% |
-23% |
-14% |
+3% |
M&Ss positive update today seems to confirm analyst forecasts that the company is on the cusp of a shift to strong earnings momentum, while Sainsbury is expected to go the other way.
How about valuation? Well, current-year estimates (ahead of todays update) put M&S on a P/E of 17.2, falling to 16 for next year and 14.8 for 2017. The multiples for Sainsburys are 10.2, 11.8 and 11.5. I would imagine well see some earnings upgrades for M&S, lowering its P/Es although Im sure theyll remain higher than those of Sainsburys as the two companies share prices currently stand (560p and 260p, respectively).
What about dividends? Well, its a similar story to earnings, with M&S having the momentum and Sainsburys having a stalling, but higher, yield. For the current year, forecasts put M&S on a yield of 3.2%, rising to 3.3% next year and 3.6% for 2017. The yields for Sainsburys are 4.9%, 4.2% and 4.3%. Again, we could see some upgrades to M&Ss dividend forecasts but again, Im sure the yields will remain lower than those of Sainsburys at current share prices.
Its easy to underestimate the importance of momentum in retailing, and I think that on a 3-5 year view M&S could deliver a better return for investors than Sainsburys, despite the latter having cheaper earnings and dividend ratings. Im not sure, though, that M&Ss prospects are so good and Sainsburys so poor that if I already held the latters shares I would rushing to sell them to buy into M&S.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.