MKS

The Sunday Times December 18, 2005

Focus: Christmas presence

The magic and sparkle is back in Marks & Spencer’s share price, bringing seasonal cheer to investors such as Brandes whose stake has soared in value to produce a £500m profit. But, asks Richard Fletcher, will the new-found lustre last?



If Amelia Morris wants to visit her nearest Marks & Spencer store, the American fund manager has to travel 5,000 miles from her home in San Diego, California to Falmouth, Cornwall.
But despite the distance, Morris, a mother of four, managed to spot what many of the City’s most highly paid analysts and fund managers missed: the intrinsic value of the British high-street icon.



Since April 1999 Morris’s firm, Brandes Investment Partners, has invested more than £700m in M&S. After nearly six years her faith has paid off. In the past three months M&S shares have soared 43%, touching a seven-year high last week.

Brandes is now sitting on a paper profit of £500m, according to analysis of stock-market filings by The Sunday Times. For the firm it is a vindication of its value-investing philosophy. For Morris, a senior analyst at Brandes, it is a personal victory.

While analysts question whether the M&S recovery is really sustainable and traders ask how much higher the share price can go, Morris can relax in the knowledge that the value of her investment has almost doubled.

The wife of a former Wall Street banker — Ken, who now writes financial thrillers — Morris has invested billions in the UK high street over the past five years. As well as her £1.2 billion holding in M&S, she owns a combined £1.3 billion stake in Wm Morrison and J Sainsbury as well as smaller investments in HMV and French Connection.

Brandes has also bought shares in more than a dozen other British companies, including Invensys, the engineering firm, Compass, the contract caterer, and Corus, the steel group.

Morris visits Britain three or four times a year: a tennis-mad, slim woman with dark hair and striking blue eyes, she plans her trips to coincide with Queen’s or Wimbledon. She is also a regular at the Deutsche Bank retail conference in October.

Yet both Brandes and Morris shun publicity: they will not talk to the press, while those who have met Morris refuse to speak publicly about her. “She doesn’t rush into investment. She does a lot of homework,” said one chief executive.

Some describe her as closed and not very personable. “She is single-minded with a long-term focus. Very bright, but very quiet. You could mistake her for a schoolteacher from the Midwest,” said another chief executive.

But Morris was reluctantly thrust into the spotlight during Philip Green’s £9 billion bid for M&S, when she urged the board to allow the entrepreneur to carry out due diligence. It was an unusual intervention by the American firm, which has never been an activist shareholder.

In the reception of the Brandes headquarters building is a copy of the 1949 investment classic, The Intelligent Investor, by Benjamin Graham. Charles Brandes, the founder of the firm, boasts about a 100-year outlook: “We don’t have an economist. We will never have an economist. We don’t invest in the economy. We invest in businesses.”

Brandes’ investment decisions are based on a company’s cashflow, book value, market capitalisation and other indicators. It is a philosophy that gave Morris the confidence to buy and sell (at opportune moments) £1.8 billion worth of M&S shares over the past six years.

In September 2000, when M&S was in crisis after chief executive Peter Salisbury had quit and clothing sales were in freefall, other investors panicked, but Morris spotted an opportunity, picking up a further £67m worth of shares for as little as 203p.

On Friday, shares in the retailer closed at 489&189;p: for the supermum from California, M&S has proved to be a very profitable adventure.




IT IS not just the share price that is back in vogue. The crowds at the M&S flagship store in London’s Marble Arch last week were testament to its growing popularity among shoppers.

Francesca Sozzi, 30, from east London, was among those fighting her way through the Christmas crush. “Two to three years ago it was terrible, but in the last six months it has got a lot better and become a lot more fashionable,” she said.

So what exactly has chief executive Stuart Rose done in the past 18 months? Rose has a simple mantra, which he repeats often to staff and investors: “Better product, better environment and better stores.” He spent his first two months defending M&S after the bid by Green, but having seen off the retail tycoon he immediately set about restoring self-belief at M&S.

After almost a decade of boardroom battles, a lack of leadership and increasing competition on the high street, M&S had lost its position as Britain’s No 1 clothing retailer. It had also lost its way.

“We found ourselves in a vicious circle of bad press and bad sales,” he said.

To help improve customer service he brought in Mary Gober, a motivational guru from America, who had more than 5,000 M&S staff dancing in the aisles during a four-hour seminar at the Birmingham NEC. Rose has also struck a new deal with George Davies, the designer behind the successful Per Una brand.

Rose — who had quit M&S 16 years ago frustrated by the bureaucracy and politics — has also transformed the head office. Approval of a new garment, for example, used to require 27 steps; today it involves only six.

Marketing director Steve Sharp, who has worked alongside Rose for 16 years, launched a new marketing campaign, “Your M&S”, which has proved hugely successful. Weekly sales of a luxury chocolate pudding — which featured in one advert — jumped from £10,000 to £500,000 and the initiative was short-listed for a Campaign magazine award.

The early signs are encouraging. Last month Rose announced that in the first half of the year pre-tax profits had risen 20% to £302.8m.




SO where now for M&S? Is the recovery a sustainable one or yet another false dawn for its shareholders? It would be understandable if M&S’s long-standing army of small shareholders and institutional backers were sceptical.

In 2002 Luc Vandevelde was widely credited with having turned round the troubled retailer. Vandevelde reversed a decline in sales — reporting a 10% like-for-like growth — and profits. The new clothing collections won plaudits from the fashionistas and the shares soared, touching 420p in May 2002. But by the end of 2003 the recovery had stalled and the share price plunged again.


Rose refuses to even talk about a turnround at this early stage. “If we get into the first quarter of the new financial year (April-June 2006) and we’re still growing, then I think we would be prepared to say we are recovering,” he told The Sunday Times after last month’s interim results.



He draws an analogy with property renovation, claiming that he has gone right back to the foundations and is rebuilding the entire house. And he insists: “This improvement is sustainable.”

Rivals point out that although like-for-like numbers are better than many others in the high street, he is now up against easier comparisons. They also contend that sales have been boosted by a blitz of advertising — with M&S reported to be spending an unprecedented £1m a week on press and TV adverts.

But there are few doubts in the City about where the share price is heading. Last week Tony Shiret, an analyst at CSFB and one of the City’s most respected retail watchers, upgraded his forecasts for M&S and now expects the shares to reach 500p. “This could be an exceptionally good year for M&S,” he said.

Morgan Stanley, Citigroup and JP Morgan have also raised forecasts in recent weeks. According to Hemscott, the financial-information firm, the number of analysts recommending clients to sell the stock has halved over the past three months, and despite the 40% rise in the share price, five of the 19 analysts who cover M&S still rate the shares a buy.

Yet brokers say that many UK fund managers remain underweight in M&S. With analysts predicting further rises many of these fund managers are now desperately buying M&S stock — pushing the price up even further.

The rapid share-price rise is also said to have spooked many short sellers (investors who sell shares they do not own in the belief they can buy them back cheaper at a later date) who have closed their positions, despite losses, in the belief that the shares could rise even higher.

Research by Data Explorers, which analyses stock-lending figures to detect short-selling, appears to confirm the anecdotal reports. In recent weeks the firm has seen a sharp fall in the percentage of M&S stock on loan.

But what would be the effect on the market if Brandes were to sell its holding? In recent months there has been mounting speculation about whether Morris will sell. After all, ask traders, if she was prepared to consider selling to Green at 400p, surely she is a seller at these levels.

One broker who knows Brandes well dismisses such talk. “Not surprisingly, they are very good at managing exits; look at their recent exit from ICI,” he said.

Brandes is not the only investor to have built a stake in M&S. Two other US value investors — Capital and Artisan — did so, too. Rose himself has benefited from the sharp rise in shares, having bought 50,000 at 347p in September.

Last Wednesday he was enjoying a night out with friends at one of his favourite haunts: George, the fashionable private members’ club in London’s West End. Rose looked as dapper as ever — but for the first time since he was parachuted into M&S in June 2004 he also looked relaxed.

Shareholders will have to wait until the middle of January for an update on Christmas trading — but he certainly does not look like a man dealing with dismal Christmas sales.

WHAT THE CUSTOMERS SAY

SHOPPERS interviewed at Marks & Spencer’s flagship Marble Arch store in London last week were generally upbeat, and many mentioned what they saw as recent improvements.




Mary-Anne McGuire
London

‘I regularly shop at M&S. I mainly buy clothes — underwear and suits. The food is always good, too. The only thing I probably would not buy are shoes and that is because I like a nice comfortable pair of shoes and you can’t get them from M&S.

‘M&S did go through a bad patch where it tried to go too young but I think that it is back to where it should be now.’




Sandra Bardell
Bath

‘I do my food shopping at M&S every week. About three years ago the clothing was very drab but it has improved a lot recently. The store has changed a lot recently and for the better. I have been shopping today and bought some clothes, I think I spent about £70.’




Cassandra Cunningham
London

‘I don’t really shop at M&S because it has lost its edge and hasn’t really kept up with the times.

‘It is just a bit lacking. Sometimes I might buy food from here for a special occasion. I would usually shop at Selfridges, New Look or Debenhams for clothes. M&S is really a last resort. In fact, I am off to Debenhams now because I could not find what I was looking for here.’




Sigrid Berge
London

‘The quality is good but the clothes are a no-no although I did buy a belt as a Christmas present. Maybe if it advertised more I would shop here more, but I usually go to Miss Selfridge.’




Francesca Sozzi
London

‘Everyone used to think it was a shop for older people, but now it is aiming its products at a slightly younger audience. I don’t buy food at Marks & Spencer because it is a little expensive; I usually go to Waitrose for food — not that I think that is cheap, but it is less expensive than M&S.’


Orla Jackson
visiting from Ireland

‘I probably shop at Marks and Spencer once a week, mainly for food. It really has come on leaps and bounds recently. Everyone thought the clothing was for older people but now it is a lot more fashionable and caters better for the 25-40 age bracket. The store is getting some really good gear now. It is especially good for party wear or work clothes.’