Marks and Spencer is among the day’s leading fallers on worries about the outlook for both its clothing and food businesses.
Its shares are down more than 4% to 323.5p as analysts at Numis reduced their recommendation from hold to reduce with a 295p price target.
In a hefty note on the retail sector Numis said there had been a bounceback from the immediate weakness post-Brexit vote, with consumer confidence recovering and trading - apart from weather related problems - holding up. But 2017 could be a little more difficult, the broker said:
Looking ahead, 2017 is set to be a challenging, but not disastrous, year for the General Retailers. We expect the early effects of Brexit to weigh on employment growth, and drive some inflationary pressure on household costs, such that we expect retail sales growth of flat to +1%.
On Marks in particular, Numis said the company’s new strategy on pricing looked the right move but the jury was out on whether it would succeed: It said:
Recognising after five years of negative like for likes that M&S had ‘clearly got its price dynamic wrong’, new chief executive Steve Rowe announced a series of strategic volte-faces, including double-digit price reductions on 30% of the range, a shift back to ‘good’ product, reduced seasonal phases, and a de-emphasis of the sub-brands. Essentially, the new strategy, which may well be absolutely right, amounts to having the right product available on the shelves at the right price - we see little to argue with here, but have limited visibility on what will underpin successful execution.
Food [is] a downside risk: Having successfully navigated the challenging deflationary environment over the last few years, it seems to be taken as read that M&S will continue to weather the storm in its Food division. With like for likes having tipped marginally into negative territory in the first quarter, and while we see no imminent threat, we do see any weakness in the Food division as a meaningful downside risk.
Given the warm August and September, M&S’ current trading will undoubtedly have been weak. As a result, we expect first half pretax profit to be in the region of £215m, which would suggest, even with a marked improvement in second half like for likes, full year pretax profit closer to £575m, if not worse. Versus current consensus of £590m, this suggests yet more downgrades to come.
By our calculation, M&S is now achieving a return on cash invested of just 5% and consensus expectations do not suggest any meaningful growth profile. Moreover, we are expecting downgrades in the coming weeks. And yet, on 11.2 times, it trades at a 10% premium to Next (10.2 times) on 2017 PE.
