BofA Merill downgrades M&S as apparel recovery remains "elusive"

The bank downgraded its full year 2017 and 2018 earnings per share estimates by 5%, putting it 7% below consensus. This is based on the continued decline in like-for-like growth in the General Merchandise division and lower gross margin improvement.

Merrill reckons trading remained relatively subdued in the fourth quarter, especially in GM, and forecasts LFL sales growth of -2.8% in that division in Q4, with continued market share losses.

The bank said it expects new CEO Steve Rowe to give an honest assessment of the state of the company in May.

“In terms of opex, we see less flexibility to manage opex more aggressively next year, given the introduction of the national living wage in April 2016, and M&S’s need to pay its staff more competitively.”

Execution needs to be improved in many areas across the supply chain such as design and availability, and price points are out of kilter in some areas, especially across the core ranges, Merrill said.

It said that while the dividend yield of around 4.5% provides some support, there is limited scope for growth and Merrill sees better investment opportunities in the sector.

At 0945 GMT, M&S shares were down 1.6% to 400.05p.