UBS has cut its target price for both Debenhams PLC (LON:DEB) and Marks and Spencer Group Plc (LON:MKS) as it considered the potential impact on profit margins from the push towards online sales channels by general retailers.
The Swiss investment bank trimmed its target for Debenhams to 18p from 23p, saying the department store chain could see costs of over 13p for every £1 of in-store sales because of the channel shift.
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In a note to clients, the bank said: “Whilst Debenhams has not set an official online penetration target, management has suggested a future mix of c.30% online. For the UK, this equates to £330mln revenue. Applying Next Plc's (LON:NXT) analysis of -13p PBT [profit before tax] impact per every £1 of in-store sales moving online, we could see a £43mln PBT hit (UBSe FY18 PBT £53mln)”.
Analysts added that Debenham’s higher operational gearing and lower operating profit margin meant it could see more sUBStantial impact from the channel shift than Next.
M&S could see 12% profit hit in 2018
Regarding Marks and Spencer, UBS reduced its target price for the FTSE 100 retailer to 275p from 340p.
In its analysis the bank said applying its impact calculations from Next, the channel shift could see a hit of 12% to the group’s pro forma profits for 2018.
UBS analysts commented: “M&S is targeting online Clothing & Home sales to increase from 18% of the total to one third by FY22. This would see c£550mln sales move channel. The pro forma profit impact – by applying the calculations from Next – is 11% of FY22E group PBT, or 12% of pro forma FY18 profits”.
“It is difficult to assess how much of the potential c£70mln impact is incremental and how much is in existing cost guidance, but if it is indeed incremental then M&S would show no profit growth at all over the next four years” they added.
Debenhams shares were down 0.84% at 21.3p in mid-morning trading Tuesday, while Marks and Spencer shares were up 0.3% at 268.8p.