M&S food turnaround 'will take longer' - RBC downgrades

RBC Capital Markets thinks Marks & Spencer will take time to turn around its food business and so has downgraded its rating on the retailer.

RBC said M&S should continue to generate enough cash in coming years to keep up its dividend payments, though so the rating was just cut to 'sector perform' from 'outperform' as the target price was trimmed to 320p from 330p.

Having completed around a third of its food range reviews, the rest is expected to be completed by April and then it will "take time for customers to notice its new lower prices" and RBC analysts don't expect sales to regain momentum until "well into next year". Group forecasts have been nudged down 1-2% as a result.

Longer term growth prospects "may be constrained by its already high market share in the premium segment, and its low basket size online which makes the economics of home delivery unattractive".

Looking to the Clothing & Home segment, there are further opportunities to improve margin, while the analysts expect like-for-like sales to perform broadly in line with the sector, while behind the scenes improvements are made to buying and inventory control.

With over 90% of sales from the UK, the company is a domestic consumer proxy and so is reliant on the Brexit outcome, but there is a "substantial" cost reduction opportunity.