business

Investors in M&S Are Pinning Their Hopes on This Man

  • Short interest in retailer M&S hovers near record: IHS Markit
  • Investors believe Chairman Archie Norman can ‘shake things up’
Archie Norman. Photographer: Simon Dawson

As short sellers swoop on Marks & Spencer Group Plc, value investors are pinning their hopes on a man with a history of turning around struggling businesses.

Archie Norman, 63, a former lawmaker who joined the iconic British retailer as chairman in September, is credited with leading the Asda supermarket chain from near bankruptcy in the early 1990s to a 6.7 billion-pound ($9.5 billion) sale to Wal-Mart Stores Inc. in 1999. Shares in broadcaster ITV Plc rose more than 300 percent during Norman’s six-year tenure as chairman there.

Archie Norman

Photographer: Simon Dawson/Bloomberg

Some investors have faith he can have a similar influence on M&S, which traces its roots to a market stall in Leeds in 1884 and is best known for its blend of own-brand food and clothing.

“I think he recognizes that there are issues in the business and that those issues need dealing with,” said Martin Walker, a fund manager at Invesco Perpetual who holds M&S shares in the firm’s U.K. Growth Fund and U.K. Focus Fund. “That may lead to some volatility in terms of business in the next 12, 18, 24 months, but ultimately it makes the business potentially worth a lot more in the longer term.”

Doubters prevail. With short interest hovering near a record high, M&S is among the most-shorted stocks in the FTSE 100 Index alongside grocery peers J Sainsbury Plc and Wm Morrison Supermarkets Plc, according to IHS Markit Ltd. data. Much-younger online rival Asos Plc overtook M&S in terms of market capitalization in November.

M&S is among U.K. retail stocks that Simon Murphy, a fund manager at Old Mutual Global Investors, says he’s cautious about. Credit Suisse analyst Pradeep Pratti said the retailer looks increasingly like “a value trap” in a Jan. 24 note, lowering his recommendation on the stock to underperform.

Supermarket chains have spent years struggling against the growth of discount grocers, and department and toy stores are taking hits from Amazon.com Inc. as more shoppers switch to online shopping. Compounding their predicament in 2017 was the pound’s decline, which pushed up inflation amid stagnant wage growth. M&S last month reported a drop in sales over the Christmas period.

Invesco’s Walker, who hunts for value stocks, says M&S has enough cash to fix the business and its dividend is secure. He sees the consumer environment improving later this year. M&S’s perception as an iconic British brand also counts in its favor, he said.

“There are very few businesses in the U.K. that, if they cease to exist tomorrow, the population of the U.K. would be upset about,” said Walker, who is based in Henley on Thames, England. “M&S is one of those businesses. There’s a huge amount of latent goodwill stored up in the M&S brand in terms of our cultural heritage and I think that gives it a good opportunity to recover its product proposition.”

‘Shake Things Up’

Walker’s view is shared by Tawhid Ali, a fund manager at AllianceBernstein in London. While he has “very little exposure” to the U.K. consumer in the firm’s European Equity Portfolio, which has beaten 97 percent of peers in the past year, M&S makes up “a little below” 2 percent of the holdings, he said.

Ali is attracted to M&S’s strong brand and sees the potential for the company to make savings that could be redeployed into improving the supply chain and the company’s online presence.

“M&S is an institution steeped in history,” Ali said. “It’s an institution steeped in bureaucracy. There’s a lot of inertia and you really need someone like Archie to shake things up.”

He points out that M&S’s earnings have remained relatively stable despite the competitive threat from other retailers and online rivals. Annual adjusted earnings before interest, taxes, depreciation, and amortization have stayed above 1 billion pounds since 2006, according to data compiled by Bloomberg.

Forget “the noise,” said Ali. “That’s the way we look at it. At the end of the day, this isn’t something that’s broken.”

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