Watch to buy Marks & Spencer as it completes a classic base formation

Investors impressed by Marks and Spencer’s latest guidance. Time to buy into its recovery story?

In the latest trading statement (6 Nov), Marks & Spencer (MKS), the century-old retailer, said that the management is seeing ‘potential’ in its difficult transformation.

Investors were impressed. Initially, prices rose, but closed flat on Wednesday. In today’s session, however, prices surged by more than 7% to 195p in morning trades.

In the half year to 28 September, group revenue declined by 2% to £4,861m while profits before tax rose by 50% to £153.5m.

Meanwhile, MKS’s restructuring exercise saw double-digit store closures while saving £75m in the first half. Over the past 12 months, Marks’ balance sheet was strengthened by a rights issue, bond issue and dividend cut. One objective of these cash injections was to complete a deal with Ocado Retail, which the firm said will bring transformational changes.

The question many investors are asking: Is Marks and Spencer ready for a period of uptrend? Remember we are looking only at the equity portion of the company. At its latest statement, MKS is sitting on net debt of £4.1 billion while its own market capitalisation is just £3.55 billion. Having lost its FTSE 100 place, the retailer is now a ‘mid cap’. To compare, at £7.2b JD Sports Fashion’s market cap is twice as big as Marks.

But if Marks can clear the overhead 200p resistance, it signals that a base of intermediate significance has been completed. But its recovery is unlikely to be a straightforward affair. I expect setbacks and corrections on the way. But given some of the real changes we are seeing in stores, as detailed in its latest statement, investors are likely to give the management the benefit of the doubt. Watch to buy on setbacks. Who knows, Marks & Spencer may even recapture its FTSE 100 seat sometime in the future.

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