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Investing.com -- Jefferies has downgraded Marks and Spencer Group (LON:MKS) (M&S) to a ’hold’ rating, citing concerns over the UK employment outlook and the stock’s valuation nearing the upper range of its historical trading multiples.
The move comes as analysts at Jefferies weigh the impact of disposable income recovery against a potentially more pressured jobs market.
In a note dated Wednesday, Jefferies noted that while UK consumers are experiencing a notable recovery in disposable income, the employment landscape is showing signs of strain, particularly for lower-skilled workers.
The brokerage’s proprietary UK consumer cash flow model suggests a 6% growth in fiscal year 2025/26, driven by wage increases and easing energy costs.
However, potential headwinds in the labour market have prompted analysts to reassess their stance on M&S, shifting it to ’hold’ from a ’buy.’
Despite continued growth opportunities, Jefferies argues that consensus estimates for M&S now appear more aligned with its own projections, leaving limited room for further upside.
The valuation of M&S has expanded to what the analysts describe as "more appropriate levels," currently trading at 11 times its expected 2025 earnings.
Historically, UK discretionary stocks have traded in the 9x to 13x range, suggesting M&S is at the higher end of its valuation spectrum.
This positioning, coupled with the retailer’s exposure to potential negative UK economic developments, has influenced Jefferies’ decision to downgrade the stock.
Jefferies has set a new price target of 370p for M&S, down from its previous target of 410p. This adjustment reflects a more cautious approach as analysts weigh the balance between a strengthening UK consumer and the risks posed by a softening employment market.
The downgrade places M&S among stocks that Jefferies believes may face greater pressure from incremental UK economic challenges, alongside Associated British Foods (OTC:ASBFY), which remains on a ’hold’ rating with a revised target price of 2,000p.
While Jefferies has downgraded M&S, the firm remains optimistic about other major UK retailers. It reiterated its ’buy’ ratings on Tesco (OTC:TSCDY), Next (LON:NXT), and Sainsbury’s, viewing them as market-share winners that are better positioned to navigate the current economic environment.
Tesco and Sainsbury’s, in particular, are seen as benefiting from a stable food retail sector, with industry-wide inflation expected to provide a cushion against rising labour costs.
The broader backdrop of Jefferies’ analysis highlights a mixed outlook for UK retail. While disposable incomes are set to improve, the firm is adopting a more selective approach, favouring stocks with stronger market positioning and more resilient earnings potential.
M&S, despite its recent performance, is now seen as more vulnerable to economic uncertainties, prompting Jefferies to take a more measured stance on the stock.