Marks & Spencer still a 'sell' for Berenberg as new CEO Rowe takes over

Ahead of Marks & Spencer's results on Thursday, Berenberg reiterated its 'sell' recommendation and cut its earnings forecasts for the next three years due to the continuing decline in clothing sales.

Thursday's fourth-quarter results for the three months to 31 March 2016, coming ahead of final results on 25 May, are expected to show general merchandise (GM) like-for-like (LFL) and total sales growth both decline 2.5%.

In Food, Berenberg believes M&S’s focus on innovation and convenience will drive continued outperformance with 0.4% LFL growth and 3.4% total growth in the quarter.

With former clothing boss Steve Rowe taking over from Marc Bolland as chief executive at the weekend, analysts at the bank view said he had two options to counter the highly competitive sector backdrop that has resulted in roughly 23 quarters of GM LFL sales declines and circa 7% price deflation across the sector: invest in lowering prices or improving product quality.

For the just-ended 2016 financial year, Berenberg forecasts a 250 basis-point GM gross margin improvement, in line with current guidance, but for the next two years has cut its expectations by more than half to 75bp and 50bp respectively.

"Given issues with brand perception and store locations, we are unconvinced such investments will derive the required increase in revenues," they wrote.

"Furthermore, we believe the shift of sales online adds incremental cost, but is simply cannibalising store-based revenues, putting pressure on margins."

On the view that that the stores "are too big", which resulting broad-church approach weakens brand perception, analysts believe in order to protect margins M&S must significantly reduce its estate.

However, with 60% of space freehold and only 28% of leases expiring within the next five years, they believe an extensive restructuring is highly unlikely.

Berenberg, which has set a price target for the retailer of 380p, also cut full year earnings per share estimates by 2.9% for 2016, 4.0% for 2017 and 4.1% for 2018.