RBC downgrades Marks & Spencer on higher execution risk, fair valuation

Investing.com -- RBC Capital Markets downgraded Marks & Spencer Group PLC to “sector perform,” citing higher execution risk and limited valuation upside compared with peers. 

Shares of the British retailer were down 1.4% at 03:23 ET (07:23 GMT).

“We think execution risk is higher post recent cyber disruption, and we think valuation upside is less than for some other retailers,” the brokerage said.

The brokerage said M&S is well positioned in premium food, where it has consistently outperformed the wider market. 

The retailer’s focus on premium, specialty, and healthy offerings, alongside more frequent innovation, supports growth. 

RBC noted that M&S now introduces 30-40 new food lines to stores weekly, compared with fewer, larger drops in 2023. 

Its 50% stake in Ocado Retail is expected to consolidate earnings while supporting top-line growth amid structural expansion in online food retail.

However, M&S faces challenges in Clothing & Home. RBC highlighted that while womenswear has strengthened, the retailer must still improve supply chain efficiency to compete with peers such as NEXT, which delivers higher operating margins and sales densities. 

The brokerage noted, “We believe that M&S has a higher cost to serve in Clothing & Home versus some key competitors, and we expect that this will be an area of focus for John Lyttle, the new Director of Clothing & Home.”

M&S’s heavy reliance on the UK market, roughly 95% of sales, leaves it exposed to potential consumer headwinds. 

RBC expects household cashflow growth to fade over the next year amid a cooling labor market, though food inflation is likely to support the company’s food sales.

The cyberattack earlier this year disrupted online operations, particularly affecting food ordering and stock optimization.

M&S reported a £100 million impact to food operating profit in the first half and a £200 million hit from lost online Clothing & Home sales. RBC said some warehouse automation and loyalty initiatives have been delayed. “We expect execution risk is now higher given the event-driven nature of M&S’ food shop,” the brokerage noted.

Shares have rebounded and now trade at 13x CY26e P/E, which RBC considers fair versus Sainsbury’s at 13.5x, Tesco at 14.5x, and NEXT at 16.5x.

EPS forecasts for FY26-27 were raised slightly to reflect stronger end-of-half performance in food and clothing. 

RBC set a revised price target of 400p, up from 375p, based on a combination of discounted cash flow and sum-of-the-parts analyses.

Long-term opportunities remain in underpenetrated clothing categories, including women’s dresses, men’s casualwear, and children’s daywear. 

RBC also noted that Ocado Retail continues to grow on the top line, while international operations face weaker demand in markets such as India.

RBC welcomed M&S’s recent confirmation that Chairman Archie Norman will remain until 2029, calling it “very much in the best interests of M&S and its shareholders as the company moves to the next phase of its development.”

The ramp-up of online fashion sales, as well as the upcoming half-year results, are potential catalysts, according to RBC. 

Risks include UK consumer spending, ongoing cyber disruption effects, and competitive pressure in food and clothing segments. 

RBC outlined upside and downside scenarios of 450p and 300p, respectively, depending on sales growth, margins, and execution performance.