Marks & Spencer rallies on Merrill upgrade

Marks & Spencer got a boost on Monday as Bank of America Merrill Lynch upgraded the stock to ‘buy’ from ‘neutral’ and lifted the price target to 400p from 330p.

The bank acknowledged challenges from a tough UK macroeconomic environment and longer-term issues such as an ageing customer base and largely US dollar sourced business, but said these were secondary to the group’s ability to drive positive like-for-like sales.

“While not blind to the challenges M&S faces, we believe consensus is too pessimistic on 2018 where we forecast positive LFLS in Clothing & Home (compared to consensus at -2%) as we believe easy prior year comparisons, an aggressive approach to pricing and a rejuvenated product range can all serve to support growth.”

In terms of the food department, it expects to see continued market share gains and reckons M&S could be in an ideal situation to benefit from modest FX-driven inflation and the increase in the living wage given its geographic footprint.

In addition, the bank pointed out that the company’s gross margins are more insulated from FX than its peers. It noted M&S has lost between 200 and 400 basis points of potential gross margin from 2012 to 2016 due to markdown and discounting.

“We believe this represents a significant opportunity to improve margins and should provide a degree of insulation from the FX pressures we expect the apparel market to face in 2017.”

Merrill said consensus still underestimates the cash generation of M&S and a likely improving working capital profile as the business mix shifts towards food.

At 0840 GMT, the shares were up 3.6% to 350.90p.