Is Marks and Spencer Group an Exciting Emerging Market Play?

LONDON -- While crippling austerity in Europe and fiscal obstacles could put the brake on growth rates there, in developing regions a backdrop of accommodative central bank action, elevated commodity prices and rising personal affluence levels have created an environment of exceptional commercial opportunity.

The divergence between the growth prospects of traditional and developing markets is borne out by latest International Monetary Fund's (IMF) growth projections, which expect developing nations and emerging markets to expand 5.3% and 5.7% in 2013 and 2014, respectively. By comparison, it anticipates that the U.S. economy will rise 1.9% this year and 3% in 2014, while eurozone GDP is forecast to dip 0.3% in 2013 before rebounding just 1.1% next year.

Bubbly activity in these developing geographies can create large opportunities for many London-listed firms. Today, I am looking at Marks and Spencer  (LSE: MKS  ) and assessing whether its operations in these regions are likely to underpin solid earnings growth.

First-quarter results show international sales surging ahead
Marks and Spencer announced in April's trading update that group sales increased 3.1% in January-March, with total British sales rising 2.6% in the period. However, like-for-like sales rose just 0.6%, with general merchandise slipping 3.8% as its beleaguered clothing division continued to toil. The three-month period represented the seventh consecutive quarter of shrinkage in this area.

Even though like-for-like food sales continued to grow, expanding 4% in the third quarter, more pain is expected to press the firm in the near term due to sinking demand for its clothing ranges. However, I believe that performance in international markets is set to step up significantly, particularly in Asia, as its transformation plan comes to fruition.

Revenues from abroad leapt 7% on a constant currency basis, or 6.7% as reported, in January-March. In particular, the retailer noted a strong performance in China and India, while "good" business was also reported for the Middle East.

Developing market activity set to pick up the pace
The firm is hoping to use its strong brand name to capitalize on rising affluence levels across Asia, the Middle East, and Eastern Europe. Operating margins abroad came in at 13% vs. 8% at home in 2012, while return on capital employed registered at 34% against 15% in the U.K., illustrating the excellent profitability potential in faraway markets.

Marks and Spencer already has around 130 stores in Asia, and is aiming to boost the number of outlets here significantly in the near future. It is looking to add another 50 stores in India by 2016, and is hoping to build the number of its Hong Kong and Shanghai stores in China.

As an aside, the firm advised that multichannel sales leapt 22.9% in the third quarter, as web traffic increased and mobile shopping jumped an enormous 70%. Multichannel expansion is playing a huge part in the firm's foray into new geographies, alongside building the franchise model, and improving performance here bodes well for website traffic from new regions moving forward.

So is Marks and Spencer a buy?
Earnings per share are expected to fall 8% in the year ending March 2013, to 32 pence, results for which are due on Tuesday, May 21. However, earnings are expected to snap back from this year onward, with growth of 7% to 35 pence and 8% to 37 pence forecast for 2013 and 2014, respectively.

The retailer is liked by investors owing to its better-than-average dividend policy. Brokers expect last year's 17 pence per share to edge fractionally higher for March 2013 before marching higher thereafter -- anticipated dividends of 17.8 pence per share for 2015 and 19.1 pence in 2015 per share provide yields of 4.3% and 4.6%, well ahead of the average forward yield of 3.3% for the FTSE 100.

Marks and Spencer was recently changing hands on a P/E ratio of 12 and 11.1 for 2014 and 2015, correspondingly, symbolizing a gargantuan discount to a prospective earnings multiple of 23 for the whole general retailers sector. In my opinion, an expected rebound in earnings, combined with decent dividend potential, makes the company a stock worthy of serious consideration.

Bolster your investment income with the Fool
If you already hold shares in Marks and Spencer, and are looking for more FTSE 100 winners to really jump-start your investment income, then you should check out this brand-new and exclusive report covering a multitude of other premium payers right now.

Our "5 Dividend Winners to Retire On" wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical, and utilities plays, which we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no obligation.

link


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2395732, ~/Articles/ArticleHandler.aspx, 8/21/2014 6:17:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement