Interactive Investor

Marks & Spencer shares jump on broker praise

25th August 2021 13:44

Graeme Evans from interactive investor

The high street favourite continues to enjoy a strong pick-up in its fortunes following the lifting of lockdown.

Marks & Spencer (LSE:MKS) shares are suddenly all the rage in the City after another “buy” note put the chain alongside Next (LSE:NXT) and fast-fashion's ASOS (LSE:ASC) and Boohoo (LSE:BOO) as top picks in European clothing.

The Deutsche Bank recommendation is one of several this week backing the high street retailer after Friday's shock trading update reversed the usual trend of downward profits guidance.

Shares rose another 3% or 5.5p today and are now up by more than fifth since last week, although long-suffering investors won't need reminding that the price of 176p is only back to where M&S had been at the start of the pandemic. They were 368p in May 2017.

But the momentum shift will still come as a welcome relief, particularly with Credit Suisse and Berenberg yesterday raising their price targets to 215p and 200p respectively and now Deutsche Bank going for 195p as part of its European-wide clothing review.

Noting that M&S is “finally doing the right things right”, Deutsche Bank said M&S's online growth during the Covid period had been impressive, which had helped to accelerate some of its self-help initiatives as well as turbocharge the food joint venture with Ocado (LSE:OCDO).

In particular, it praises the decision to sell third-party clothing brands such as Sosandar, Joules and Jaeger on the website and in store to drive footfall, with product innovation and cost efficiencies also delivering a better margin performance in food.

The company last paid a dividend at the half-year stage of 2019-20, but with the help of further underlying sales growth and cost efficiencies, Deutsche Bank thinks a resumption is on the cards as the balance sheet now looks to be in much better shape.

While M&S is reinventing itself as an omni-channel clothing retailer, Deutsche Bank said rival Next continues to show how it’s done after finding profitable new revenues stream at the same time as managing its historic store liabilities.

Its early investment into online has mitigated the impact from lower in-store sales, with customer loyalty and group profits underpinned by a high margin financing offer.

Calling Next “a lesson in evolution”, Deutsche Bank is backing the shares to reach a record 9,200p compared with today's 8,020p and the previous high of 8,404p set in April.

In addition to benefiting from the general consumer shift online, the bank's analysts said the future of the group lies in the ability to export the Next brand overseas.

ASOS and Boohoo saw a significant step-up in sales and profitability during the pandemic, with Deutsche Bank initiating coverage on the AIM-listed stocks with “buy” recommendations and upsides of 32% and 41% to price targets of 5,400p and 400p respectively.

The bank, however, expects fast fashion will see volumes decline and input costs rise over the coming decade as consumers become more aware of their environmental footprint.

On Boohoo, it sees sales growth remaining in the 20-25% range for the next five years and said steps being undertaken on improving culture and relationships with suppliers appear robust.

European fashion heavyweights Inditex and H&M (OMX:HM B) both have “sell” recommendations, with Deutsche Bank believing the pair will have to adapt much further to maintain their existing sales base and margin structure.

Today's note said: “With more consumers expected to shop clothing online and especially via multibrand marketplaces we believe the large clothing brands will have to increase their marketing budget to retain consumers or decide to sell their ranges via third parties. Both of these will put pressure on margins.”

The other UK-listed stock in the coverage is Primark owner Associated British Foods (LSE:ABF), which has a “hold“ recommendation and 2,220p target.

Primark accounts for over 50% of the conglomerate's earnings and has impressed in terms of its fashion, pricing and social media presence, but continues to trade without an online presence.

Deutsche Bank said: “AB Foods has not seen a big reopening bounce which presents an opportunity but this has to be weighed against potential downgrades on the Food divisions for next year.”

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