Not too long ago, the supermarket stock Marks & Spencer (LSE: MKS) was in the news because of a caterpillar cake. The company had taken its rival Aldi to court over what it sees as a trademark infringement of the cake, lovingly called Colin the Caterpillar. It so happens that Aldi’s version, called Cuthbert the Caterpillar, has a striking similarity to Colin and comes at a lower price. M&S is worried that Cuthbert is eating into its revenues because it is easy to pass off as Colin.
The price cut challenge
On the face of it, it seemed like a really small matter for a really big company. But, it does underline a big challenge faced by supermarkets. That of price cutting.
If customers are super-sensitive to prices, then supermarkets have no choice but to make them competitive. Both Tesco and Sainsbury highlight products both online and in-store that are a price match to Aldi, in a bid to both retain customers and bring in new ones. Clearly, the same challenge is presented to M&S, even if it comes packaged as Cuthbert the Caterpillar cake.
Covid-19 impacts financials
So far, though, M&S is struggling. In the last financial year that ended in March, the company saw an 11.8% fall in revenue. It is also loss-making. To be fair, last year was a struggle for many companies, so I would not judge its performance too harshly. At the same time, I would keep in mind that its revenues were softening even before the pandemic.
Still, I do not think M&S is a complete write-off either. On an adjusted basis, it is still making pre-tax profits. Adjusted numbers indicate how the company views its own performance, while reported numbers are those for government-related purposes. I think both should be looked at to get a fuller picture. And in this case, the adjusted numbers give hope.
Positives for M&S
Also, the details are not entirely bad. First, its food business has seen slight growth in terms of like-for-like sales. In a significant win, its online sales for the clothing and home segment jumped by over 50%. This partly made up for the sharp decline in in-store sales last year.
Its share price has improved much over the past year as well, with an increase of over 48%. It is also still below its pre-pandemic levels. I reckon that it is only a matter of time before it goes back to those levels, though. This is because its post-lockdown numbers can improve, which will encourage greater confidence among investors.
What I’d do about the FTSE 250 stock now
However, it remains to be seen how much the M&S share price can increase over the long term. It is in a competitive market, where at least in some products, pricing low seems to be the only winning strategy. It may be able to take Aldi to court on one product, but will it be able to compete in totality? With this backdrop, I would wait to see a turnaround in M&S’s revenues before buying the share.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.
Motley Fool UK 2021