Marks and Spencer downgraded by broker as upside looks limited

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Marks and Spencer Group PLC (LSE:MKS) was downgraded by broker Jefferies, as any scope for further positive surprises looks limited now.


The rehabilitation of M&S looks “largely complete”, analysts said after last week’s half-year results smashed City expectations.


“Our forecasts are upgraded to above company guidance, reflecting current strong tailwinds.


“But the easy lever of outsized earnings surprises on depressed multiples has been pulled. Relative sector valuation has fully recovered,” the analysts said.


Earnings upside potential compared to the market’s new expectations “looks limited given food margin reinvestment needs and a more uncertain demand outlook.”


The resulting 20% lift in the shares after the results reflects a “much improved” short-term outlook, with the ongoing workplace and retail footfall recovery in UK cities, and “concrete evidence” that the legacy problems afflicting the company are being resolved.


The “clear improvements” in both supply chain management and distribution “are helping get stock where it is needed and supporting the strong full-price sales performance”.


But with earnings from the Food arm now recovered to healthy levels, and ambitions to expand the consumer appeal “a cap on future upside”, along with a “much healthier” full-price approach to Clothing + Home, the analysts concluded that they “see reduced scope for earnings surprises” .


“In the absence of upgrade tailwinds the potential for a re-rating kicker looks limited.”

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