FTSE falters as Mark & Spencer drops 2.5% on sales and cost concerns

by Jonathan Adams

Leading shares are heading lower into the weekend, slipping further back from their 11 month highs as investors pause for breath after the post-Brexit gains.

Marks & Spencer is the biggest faller, down 8.2p or 2.5% to 320.3p as analysts at Barclays cut their recommendation from equal weight to underweight and slashed their price target from 410p to 290p on worries about falling like for like sales and earnings, and rising costs. They said:

“The new management team’s strategy of focusing on customers and product may be the start of a turnaround story, but things can get worse before they get better. We expect a painful transition and material earnings per share downgrades. We view the price cuts in clothing lines as an essential but mostly corrective action that could keep general merchandise 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 2018 gross margin, adding to the pressure, while investment in service does not leave much room for cost cutting.

We don’t see material downside risk to M&S’s multiple but we have cut our 2018 earnings per share estimate by 20% and are now 17% below Reuters consensus. November’s strategy update may include positive news on the simplification of the clothing sub-brands, the rationalization of M&S’s international business and better use of the company’s store estate. While we expect this to be positive in the longer term, it is unlikely to have a positive impact on earnings over the next two years. We find the current low visibility on earnings per share unappealing and without signs of stabilisation in consumer confidence we see any rerating as unlikely.

We expect general merchandise like for likes down 5% in 2017 and down 2% in 2018. This is 2-3 percentage points below our previous estimate as we expect volume growth to only partially offset price investment while less discounting will likely hurt demand, especially online”.

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