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M&S double upgraded and Next downgraded as Credit Suisse rebalances views on UK retail

Published: 20:01 24 Apr 2020 AEST

Marks and Spencer Group PLC - M&S double upgraded and Next downgraded as Credit Suisse rebalances views on UK retail

Marks & Spencer Group PLC (LON:MKS) has received a double upgrade to ‘outperform’ from ‘underperform’ by analysts at Credit Suisse, who said the retailer’s food sales have left it “comparatively attractive” to its clothing-only peers in the sector.

The bank, which also cut its target price for M&S to 125p from 185p in a note on Friday, said with food sales representing 71% of UK sales and 50% of gross profit, the company was “better shielded from lockdown than pure Clothing & Home peers”, adding that food footfall “may help C&H sales as stores re-open”.

READ: M&S target price cut as Peel Hunt predicts ‘dark’ results from retailer in May

While Credit Suisse said they had reservations about M&S’s food delivery deal with Ocado Group PLC (LON:OCDO), it may be “well0timed if the [pandemic] leads to higher adoption of online food shopping”.

The bank also said the group’s clothing and home business could see up to £370mln of surplus inventory, they saw benefits for the division from “the inevitable capacity reduction offset by the need to accelerate restructuring of the store estate”.

Credit Suisse was less upbeat about clothing seller Next PLC (LON:NXT), which it downgraded to ‘underperform’ from ‘neutral’ saying the share prices did not “reflect the increasing length of the likely consumer downturn, particularly given Next’s modest online volumes and downside risk for credit balances and earnings”.

“Although Next is a best-in-class operator, adverse channel mix, its reliance on credit income, and the need to restructure the store estate do not guarantee a strong recovery”, the bank said.

READ: Next restarts online sales ‘in a very limited way’ due to coronavirus safety measures

Looking to the future, analysts said the company’s position was “unclear” and cut its target price to 4,150p from 4,300p.

“On the positive side, as the industry consolidates Next brand and Label should take market share in 2021. On the other hand it will result in accelerating retail space consolidation, forcing Next to shrink its 500 store estate increasingly rapidly, which will also accelerate the existing negative channel and product mix”, they said.

“Finally we see risk to credit from bad debts over the next year and further out a rapidly evolving consumer finance environment with cheaper retail alternatives”, CS added.

Shares in M&S were 0.7% lower at 90.7p in late-morning trading on Friday, while Next dipped 0.3% to 4,582p.

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