Last year was one of the strongest UK clothing markets in three decades but 2024 will see a "different dynamic", warned JPMorgan, as shoppers become more resistant to price rises.
So far this year, clothing sales have fallen around 1% and for the full year the investment bank forecasts growth of around 2%.
But, given expected real wage growth, investors have been inquiring why investment bank is not more bullish.
Analysing the economic theory of price elasticity of clothing price declines and the market share trends for Marks and Spencer Group, Next and AB Foods' Primark, the bank said it believes investor expectations are higher than its 2% forecast.
"Last year’s performance was boosted by price," JPM analysts said in the note to clients, "with volume elasticity not coming through to the extent built in by management teams, driving a beat and raise cycle".
"This year the dynamic is different, with higher volumes necessary to drive growth, but also with Next already having signalled a small amount of deflation."
Looking at historical price elasticity of clothing price changes, a bull case of the sort of elasticity witnessed in the early 2000s of around of -0.8 (meaning a 1% decrease in prices would lead to an 0.8% increase in the quantity of clothing purchased) would imply value growth in the UK clothing market of circa 3% in 2024, the analysts said.
But if applying the -0.4 elasticity witnessed in 2019, this would imply growth of +1%.
A mid-point of +2% has been selected as the 2024 forecast, "in line with the average value growth in the UK clothing market in the five years prior to the pandemic".
While the year has started below this forecast, the analysts noted that this is "before incremental wage hikes" land in pay cheques.
In a market lower than investor expectations, M&S is seen as the best investment option, the analysts felt.
"In this context, we prefer to own the retailer where share gains are highest, expectations are lowest, and valuation least demanding," they said, adding that M&S ticks all three boxes.
Market share gains (50 basis points in the latest data) are well ahead of Primark (20bps) and Next (flat), with the chain having demonstrated the biggest positive share turnaround coming out of the pandemic too.
"Combined with more to go for in mens and kidswear, along with compelling sales uplifts from store renewals, we see recent gains as sustainable."
Despite the already strong recovery in its shares, M&S is upgraded by the bank to an 'overweight' rating, with a target price of 330p hiked from a 'neutral' rating and 260p target before.