Marks and Spencer Group Plc (LON:MKS) has been downgraded to ‘Sector Perform’ from ‘Outperform’ by analysts at RBC as they expected the firm would take longer to turn around its key food business.
In a note, the Canadian bank said following the completion of M&S’s review of its food ranges, expected in April, they did not expect sales to regain momentum until “well into next year” given “price deflation in an inflationary sector” and the FTSE 100 retailer choosing to promote less at a time when the sector is becoming “more promotional”.
READ: Food for thought for investors in Marks & Spencer as latest update shows surprise food sales drop
Analysts added that while the company had some rollout potential, “longer-term growth prospects may be constrained by its already high market share in the premium segment, and its low basket size online which makes the economics of home delivery unattractive”.
Regarding the clothing business, RBC expected M&S to perform “broadly in line with the sector on an LFL basis and further improve its buying and inventory control” but added that it still lagged behind in terms of online capability and penetration.
Despite some of the struggles, the bank said the company’s cash flow generation remained good with falling net debt and “a working capital opportunity around year-end, providing confidence in the dividend outlook”.
“M&S is also broadly on track with its restructuring programme and recently reduced its capex guidance, further boosting its cash flow profile. A historical analysis of M&S' financials suggests a substantial cost reduction opportunity. M&S is aiming for at least £350mln of cost savings by 2021, driven by its UK store closure programme”.
Target price trimmed as Brexit cloud looms over UK sales
RBC also trimmed its target price for M&S to 320p from 330p, adding that with over 90% of its sales from the UK the company would remain “partly reliant” on British consumer prospects, the outcome of Brexit, and the state of the pound.
The downgrade follows a trading update at the start of November when M&S reported a surprise 2.9% drop in food sales in the first half of its fiscal year.
The retailer, which is undergoing a painful restructuring including the closure of 100 high street stores, also reported a 2.2% drop in LFL sales for the first half while revenues dropped to £4.9bn from £5.1bn a year ago.
In early trading Wednesday, M&S shares were down 1.2% at 305.8p.