Barclays has downgraded Marks & Spencer’s stock from “equal weight” to “underweight”, as the bank expects things to get “worse before they get better” for the retailer.
A strengthening dollar and a rise in cotton prices are expected to take a toll on the firm, a note from Barclays said.
It said it expected the retailer’s turnaround to be a “painful transition”, adding: “We view the price cuts in clothing lines as an essential but mostly corrective action that could keep clothing like-for-likes deep in negative territory in 2017 and 2018.
“We expect the strong appreciation of the US dollar and higher cotton prices to have a 130 basis points negative impact in the full-year 2018 gross margin, adding to the pressure, while investment in service does not leave much room for cost cutting.”
The bank said it expects M&S’s plans to simplify its clothing sub brands and rationalise its store estate will have a positive effect in the long term, but will hit profits over the coming two years.
“We find the current low visibility on earnings per share unappealing and, without signs of stabilisation in consumer confidence, we see any re-rating as unlikely. We downgrade M&S to underweight from equal weight, with a price target of 290p, down from 410p.”
The bank said it expected general merchandise like-for-likes to drop 5% year on year in 2017 and a further 2% in 2018. This is two to three percentage points below its previous estimates.
Like-for-like clothing and homeware sales at M&S fell by 8.9% year on year in the first quarter of 2016 after it pushed its summer Sale back by two weeks and reduced its promotional activity.