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Is M&S’s 25 years in the FTSE 100 about to come to an end?

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

There has been no let-up in the retail sector as one high street name after another has admitted falling foul of the consumer crunch. Now Marks & Spencer, widely-regarded as a bellwether of the UK retail sector, is at very real risk of falling out of the FTSE 100 index, which it has been an unceasing member of for the past 25 years.

Marks & Spencer

M&S, the 135-year-old retailer, which has been a member of the FTSE 100 since it was launched in 1994, has seen its shares plummet. At 243p they are the lowest they have been in over a decade and the near-10% fall they took as they announced the almost identical near-10% fall in annual profits, earlier this month didn’t help. Marks & Spencer’s market value fell by more than £410 million in one day as it also announced a deeply discounted £601.3 million rights issue to pay for a venture with Ocado, the online grocer.

The shares are now back to where they last were in December, reducing the retailer’s market value to just under £4 billion and putting it in serious danger of relegation to the mid-cap FTSE 250 index at the next reshuffle, the constituents of which will be announced on 5 June.

It’s not the first time though that it has come close. This time last year speculation was rife that M&S had a chance of falling out of the top 100 during the quarterly reshuffle after its shares fell 5.5%. However, at crunch time it faced a reprieve; recovering to sit just nine spots away from being relegated into the FTSE 250 zone.

However, this time it may not be as lucky. Earlier this month Marks and Spencer revealed the cost of its restructuring is dealing a heavy blow to its bottom line. It took a £439 million hit from exceptional costs in the year to 31 March, mainly from store closures, more of which are planned this year.

This reduced its statutory pre-tax profits to just £84.6 million, only slightly ahead of the £66.8 million it made in the previous year when it took an even bigger exceptional charge. All in all, over the past four years, the retailer has had to write off more than £1.6 billion in one-off charges. The company also cut its dividend by 26% to 13.9p per share.

UK food revenue fell 0.6%, with like-for-like revenue down 2.3%, while clothing and home revenue fell 3.6%, impacted by store closures, with like-for-like revenue down 1.6%.

Chief executive Steve Rowe said: “M&S is changing faster than at any time in my career - substantial changes across the business to our processes, ranges and operations and this has constrained this year's performance, particularly in clothing & home.

“We are deep into the first phase of our transformation programme and continue to make good progress restoring the basics and fixing many of the legacy issues we face. However, we remain on track with our transformation and are now well on the road to making M&S special again.”

Of course, Marks & Spencer is far from alone in its woes. Just this weekend it emerged that “significant liquidity issues” at Sir Philip Green’s Arcadia Group were worse than had been revealed just two days earlier.

Arcadia, owned by Lady Tina Green, the wife of chairman Sir Philip, says sales in its stores opened more than a year fell 9% in 2018-19. Earnings this year are expected to be £30 million, compared with £219 million two years ago. Faced with fixed charges of £100 million a year, the group says it is struggling to pay its way.

A Company Voluntary Arrangement or CVA, which we have heard a lot about over the past year from the retail sector is one potential short-term solution, providing the capacity for struggling companies, like Arcadia, to put a series of proposals to its creditors.

But critics say it raises as many questions as it answers and fails to address key branding and operational problems in the company. Something which Marks & Spencer is also all too aware of the need to tackle itself. But something which also comes at a cost.

More on Marks & Spencer

Five year performance

As at 24 May
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
M&S 32.4 -35.2 -0.1 -19.6 -20.7

Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 24.5.19, in GBP terms with income reinvested 

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