This change in corporate philosophy, couple with the online grocery's joint venture with Ocado, is key to understanding why the investment case at M&S is “evolving”, the US bank said.
M&S in February agreed to pay £750mln for a 50% equity stake in Ocado’s UK food retail unit, a business that generated sales of £1.48bn and underlying earnings of £34.2mln in its last full year.
The high street fixture said it will fund the whole upfront consideration via a £600mln fully-underwritten rights issue and would also cut back future dividends to free up cash.
Citi’s general retail and food retail analysts put their heads together to undertake a “detailed bottom up scenario analysis” of the Ocado JV, which suggests a £4.7bn sales base and £334m EBITDA after 15 years would be possible.
“The Ocado JV deal is an elegant solution to a structural gap in the M&S business model and reflects a bold decision to buy into a market leading online proposition.”
With the changes all part of M&S “making itself more relevant for the next decade”, analysts Adam Cochrane and Nick Coulter said the structural changes at the group have the potential to “re-invigorate the M&S business to a greater degree than investors expect”.
Citi upgraded its rating to ‘buy’ from ‘neutral’, hiking its target price to 330p from 290p.