StockBeat: Marks & Spencer's Fall From Grace Ends in FTSE Exit

© Reuters.

By Geoffrey Smith

Investing.com -- It’s the end of an era.

Marks and Spencer (LON:MKS), an institution of the British high street for over a century and a founder member of the FTSE 100 back in the 1980s, is about to be ejected from the U.K.’s blue-chip index.

FTSE Russell, which owns the index, said late Tuesday that the department store chain, along with software group Micro Focus (LON:MCRO) (whose problems we documented here last week) and insurer Direct Line (LON:DLGD), are all set to be demoted to the FTSE 250 at the regular quarterly review on Wednesday.

For M&S, it’s been a long time coming. For years, the trend has not been the friend of department stores, and while the company succeeded temporarily in stemming the decline by carving out a niche for itself in the high end of the grocery market, the march of the Internet and fast fashion have left it floundering. The share price, which fell 1.8% on Tuesday in reaction to the news, is down nearly 75% from its pre-crisis peak in 2007, and down by well over half from its post-crisis peak in 2015.

The problem was that analysts thought the company overpaid for a 50% stake in the joint venture that the two created. Even worse (from a short-term perspective), it did so by diluting shareholders with a 600 million-pound capital increase and a dividend cut.

To add to the gloom, analysts at Goldman Sachs (NYSE:GS) on Monday said the JV won’t even deliver what had been hoped, at least not for five years. According to the Financial Times, Goldman sees the joint venture making just 10.6 million pounds in free cash flow by 2024. Meanwhile, the formerly core business of clothing and household goods continues to decline, eaten alive by online rivals.

If Goldman’s analysis proves well-founded, the risk of M&S having to add more to the 950 million pounds it has already written off in exceptional costs over the last two years seems to be rising.

It’s even down by nearly a quarter since February, when it moved to strengthen its food business by announcing a tie-up with Ocado (LON:OCDO), whose best-in-class logistics technology offered M&S the chance to upscale big time in food delivery.

The FTSE 100 itself was down 0.1% by 5 AM ET (0900 GMT) on Tuesday, weighed down by fears of political instability, a weak update on retail sales from the British Retail Consortium (like-for-like sales were down 0.5% in August), and by another disappointing drop in the U.K. Construction purchasing managers index.

However. It outperformed other European markets due to fresh weakness in sterling, which inflates the value of the dollar earnings of its components. The benchmark Stoxx 600 was down 0.5%, in line with the French CAC 40 and Italian FTSE MIB.