Can Marks & Spencer and Debenhams shares survive the retail carnage?
According to the BBC, there are almost 650 chain-run shops and restaurants on our high streets that have either closed since the start of 2018, or are at risk of closing.
Approximately half of those belong to the now-defunct Toys R Us and Maplin, but that's still a shocking figure, and our top department stores have also been feeling the pinch.
The Debenhams(LSE: DEB) share price has been in freefall, shedding a massive 74% over the past five years, with EPS expected to plummet to around 3.4p this year -- from 9.2p in 2013.
First-half results released last week were disappointing, but I can't help feeling that the market has failed to factor-in the firm's chances of recovery when valuing its shares, and we could be looking at an opportunity to get in at a low point. Even with the mooted earnings drop, the current price provides a forward P/E of only seven, and that's with a reasonably well covered dividend yield of around 6.5% on offer.
New format
Debenhams is pinning its recovery hopes on what it calls its 'social shopping' strategy, which it has been trialling at its new Stevenage store since August. The new format has in-store Nando's, Costa and Patisserie Valerie outlets, and reports from customers seem to be favourable so far.
And I reckon it could be exactly what's needed. Whenever I pop into my local store, the coffee shop is always busy, and the restaurant is so popular it can be hard to get a seat at busy times. Meanwhile, it sometimes almost feels like there's tumbleweed blowing down the shopping aisles.
Marks & Spencer(LSE: MKS), by comparison, has had a less bad five years. But its shares are still down 32%, with EPS expected to show a modest five-year fall by the end of 2018.
M&S shares are more highly valued than those of Debenhams, on a forward P/E of around 10, but with similar 6.6% dividend yields that also looks like a tempting proposition. Has the market overlooked chief executive Steve Rowe's turnaround plan for the high street stalwart?
Transformation
At the interim stage in September, the company's accelerated transformation plans included the intention to focus on this, reposition that, "become a digital-first organisation," and other comfy-sounding phrases which, frankly, left me wondering exactly what they meant. What exactly does "build on our progress in Clothing & Home to focus on becoming the UK's essential clothing retailer" mean? I don't really know.
I also think the market is a bit jaded by M&S's ongoing turnaround plans, and it seems like it's been pursuing them for as long as I've been watching stock markets -- an M&S turnaround plan seems a bit like a DFS Furniture sale.
But having said all that, M&S is actually making profits and rewarding shareholders with healthy dividends. We're not expecting any dividend progress over the next couple of years, but a flat return of around 6.5% per year or so is really quite attractive.
While it might not be the number one store for clothes these days (and, I have to say I really don't think it ever will be again), I'm starting to see it as a reliable plodder that should bring in a steady cash stream. There are worse investments out there.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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