Marks & Spencer has fallen 15.25p to 383.75p after a negative note from respected Credit Suisse analyst Tony Shiret. Not only has he cut his forecasts, but he has also criticised the retailer's compensation scheme as being part of the reason for the expected decline in its performance.
He said: "In anticipation of the forthcoming preliminary results we are taking a more realistic view of our profit estimates in light of the deterioration seen in 2008 in the UK clothing market and chief executive Stuart Rose's recently expressed view that these conditions are likely to continue into 2009. We have reduced our 2008/09 profit estimates by 8% to £830m and our initial 2009/10 profit estimate of £735m indicates a further 11.5% decline in profits for that year."
Cutting his price target from 350p to 320p, he added: "Next reports its first quarter figures on 8th May. M&S reports its prelims on 20 May. The former is likely to alert investors more explicitly to the scale of problems the mid market clothing retailers have faced in 2008, the latter likely to introduce the cautious shape outlined here into profit guidance."
As for pay, Shiret says: "The management's compensation schemes have in our view been set up with too much emphasis on short term profit delivery. Both the main Annual Bonus Scheme for directors and the Performance Share Scheme focus exclusively on profit targets - in the latter case an earnings per share target. Total Shareholder Return is not included in these schemes. Why are we concerned with this? TSR makes potential award recipients focus on the same things that investors do as well as profit delivery - longer term prospects principally."
As a result he thinks M&S has gone for a short term profit fix, supported by a move downmarket. This has done nothing to address many of the core issues of the desirability of the retailer's range.
"Our point is that the strategy is clearly at best challenged and at worst failed and as such we do not agree with the company's policy of buying back shares to enhance short term earnings even if the company thinks the shares are cheap - which we do not think they are."
