UBS reiterates 'buy' on Marks & Spencer but cuts target price

UBS hailed chief executive Steve Rowe’s strategy to revive the retailer’s clothing business by reducing prices and improving the quality.

The newly appointed boss of M&S warned that profits in fiscal year 2017 would be dented as a result of the price cuts. Rowe said the company had lost £200m in clothing sales in the last three years and drastic measures were needed to turnaround the general merchandise division.

“The scale of the price cuts (15% reduction across 30% of the range) is significant enough for customers to notice and combined with less product overlap and brand simplification we expect to see the like-for-like sales improve once the price cuts annualise,” said UBS analyst Adam Cochrane.

UBS cut its estimate on pre-tax profit for fiscal year 2017 by 12% to £625m. Like-for-like sales are now expected to drop 3%, compared to an earlier estimate for a 1% decrease, due to lower margins and higher operating expenditure.

“Our price target remains set under discounted cash flow and falls to reflect lower profit estimates,” said Cochrane.

“We re-iterate our buy rating on M&S as we think the current share price more than reflects the downgraded guidance. We see greater upside risk at this stage given conservative guidance, potential sentiment improvement and healthy dividend yield.”

Shares rose 1.21% to 358.70p at 0952 BST.