UK Retail
The New CEO Cycle
(PDF: 35 Pages)
Europe
Industry View In-Line
Geoff Ruddell, Edouard Aubin, Amy Curry, Francois Halconruy
May 3, 2017
In 2008 we identified a pattern to the performance of UK retailers following the arrival of a new CEO. We show here that the theory has continued to play out since then, which suggests that Debenhams and M&S could be about to perform well, but that it may be time to take profits in Morrisons.
Several years ago we published analysis showing that there was a well established pattern for new CEOs in the retail sector. Back in May 2008 we published a report that looked at the 12 instances over the previous 10 years when FTSE 350 retailers had appointed 'outsiders' as CEO. We identified a clear pattern, with the shares rarely outperforming in the first few months after the CEO's arrival, or over the very long term. We found, however, that there was usually a 'sweet spot', generally between months 6-30 after the CEO arrived, where the shares tended to perform well.
In this report we have updated the analysis, which suggests that the pattern continues to hold true. We look here at what has happened in the nine years since our original report. We show that there have been a further 10 instances where FTSE 350 retailers have made external CEO hires and that the pattern we identified back in 2008 has continued to prove a pretty good guide to relative performance.
It suggests that Debenhams could be a very interesting investment over the next year or two...
In this context we think it worth highlighting, despite the underwhelming response to its new CEO's strategy update, that Debenhams is now entering the phase that our analysis suggests may lead to significant share price outperformance. We view Debenhams as too high risk a situation (albeit one offering potentially high reward)for us to rate it at Overweight, but our 60p price target offers c15% upside....that M&S could be about to outperform significantly… Steve Rowe is not an outsider at M&S; however, we think he has the kind of mandate for change usually associated only with external appointees, so we think our theory could be applicable here too. If it proves correct, M&S shares should perform strongly over the next year or so. We remain Overweight, with a 460p price target.
...and that it may be time to take profits in Morrisons… On the other hand, however, our theory suggests that Morrisons' period of outperformance could soon come to an end. We continue to rate Morrisons at Underweight, with a 170p price target, and believe that the improved operating performance witnessed in recent quarters is likely to prove shortlived.
While we do not suggest readers abandon bottom-up analysis and valuation considerations, and invest solely on the basis of this 'New CEO cycle' theory, we do think that it would be unwise to simply ignore a pattern that has been repeated so consistently over the last 20 years.
Authors
Morgan Stanley & Co. International plc
Geoff Ruddell
+44 20 7425-8954 EMAIL
Morgan Stanley & Co. International plc
Edouard Aubin
+44 20 7425-3160 EMAIL
Morgan Stanley & Co. International plc
Amy Curry
+44 20 7425-6623 EMAIL
Morgan Stanley & Co. International plc
Francois Halconruy
+44 20 7425-5207 EMAIL
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