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Is the Turnaround Under Way at Marks & Spencer Group?

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LONDON -- After a brutal decade, Marks & Spencer  (LSE: MKS  ) roared through 2012, with its shares up almost 24% during that time. So now we must ask: Is the turnaround story finally under way for this retailer?

Since December 2002, Marks & Spencer shares have returned an average of 1.9% per year, well below the 7.9% return on the FTSE 100 (these returns assume dividends were reinvested).

Marks & Spencer's yield of 4.3% is pretty attractive in today's rate environment, and it doesn't appear the company's cash flows are under threat despite the tough retail market. Despite uninspiring growth in its share price, Marks & Spencer has delivered a dividend increase of nearly 6% over the past 10 years, so there is an argument to be made for holding on to the share just for the income it provides.

But is that enough? Certainly shareholders want more.

Marks & Sparks, I hardly knew ye
When I was a child growing up in the States, a highlight of our summer trips to visit family here in the U.K. was a chance to shop at good old Marks & Sparks. We'd tour the busy store with wide eyes and stock up on a few enviable items of clothing.

Boy, has a lot changed since then.

Today, Marks & Spencer seems a shell of its former self. Sure, it's had to change with the times and try and to keep up with the fickle consumer, but it's facing a bit of a brand and identity crisis that it can't shake.

Marks & Spencer came through the critical Christmas season with a few bruises. Though it posted modest growth in food sales, it lost ground in its general merchandising (clothing, home goods).

And it faces stiff and growing competition in both spaces, with big grocers TescoSainsbury's, and William Morrison all fighting hard, while retailers Next and Associated British Foods (owner of Primark) appear to be gaining ground with consumers.

All this makes executing on its strategy -- to become a leading multichannel retailer internationally -- a lot harder for Marks & Spencer's executive team.

Brand identity
CEO Marc Bolland -- who hails from the food industry -- has, perhaps not surprisingly, done an admirable job expanding Marks & Spencer's food business.

But Bolland has work to do if he wants to attract cost- and style-conscious shoppers to the stores. Christmas numbers for the retailer were disappointing -- down nearly 4% in general merchandise, namely clothing.

The pressure is on for Bolland, as the board has indicated they're watching closely to see what progress he can make in turning around the struggling clothing business.

Last year, he brought in a new design team to refresh the retailer's womenswear lines, but there's still work to be done to win back consumers who appear to be shopping elsewhere these days.

To buy or not to buy
Marks & Spencer shares are currently trading below 50% of their 2007 highs and about 20% above where they stood 10 years ago. With a forward price-to-earnings ratio of 11 and a price-to-sales ratio of 0.59, it looks cheap compared with its historical averages.

Investors must think about where they see Marks & Spencer going from here. Can the company find a way to grow sales ahead of the sub-3% rate we've seen over the past five years or so, and somehow improve its margins in an environment of seriously pressured consumers?

On its financial strength, the company looks solid, with relatively little debt next to its free-cash-flow average of about 440 million pounds for the past five years.

Looking at its revenue streams, the food business continues to be solid, growing by 4% annually, and multichannel sales have grown 24% per year for the past three years.

However, general merchandise (primarily clothing) is declining, and, considering it drives more than 40% of the company's revenue, that's not a trend investors like to see.

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