Marks & Spencer will narrow the gap on its rival Next over the next 12 to 18 months thanks to increasing its direct sourcing in its general merchandise division, according to credit ratings analyst Moody’s.
Marks & Spencer
The agency said Next will retain a stronger credit profile than M&S due to its superior margins, solid brand recognition, premium online distribution channel and tight cost control.
M&S has upped its direct sourcing from 20% in the 2013 financial year to 60% for 2015, with a target of 70% by the 2016 financial year, resulting in a strong improvement in general merchandise profitability, although Moody’s said its sales growth remains weaker.
Next had a gross margin of around 61.2% last year, compared with 52.6% for M&S. Next’s gross margin is expected to remain stable while M&S’s is expected to strengthen to 55.1% for the 2015 financial year, said Moody’s in a report published yesterday.
In terms of property portfolios, Next has fewer stores and a stronger asset turnover, while M&S has a higher percentage of freehold properties, which means it can close unprofitable stores. But Next’s shorter leases offset its higher exposure to leasehold properties, the ratings agency said.
“We expect both UK retailers to continue to benefit from a stable macroeconomic environment,” it said. “However the UK market will remain very competitive in the next 12-18 months with promotional activity continuing to exert pressure on profit growth.
“Although Next has a stronger balance sheet, we expect M&S to generate stronger cashflow after shareholder distributions and to reduce its leverage.”
The agency maintained its Baa2 long-term rating for Next and Baa3 for M&S.