Marks & Spencer is closing in on its high street rival Next after boosting the profitability in its troubled clothing business by bringing more of its design in house and sourcing directly from suppliers, according to analysts at credit ratings agency Moody’s.
In a note published the morning, Moody’s said Next’s credit profile is stronger than that of M&S and will remain so over the next 12-18 months thanks to its “superior, well-established logistic process” and stronger gross margin of around 61.2 per cent last year.
That compares with a gross margin of 52.6 per cent for M&S. However Moody’s said the gap will narrow this year as Next’s gross margin remains stable and M&S’s strengthens to 55.1 per cent.
Next’s online penetration is materially higher with 39.4 per cent of sales generated through its online Directory arm. However M&S' online business is growing more rapidly thanks to the recent overhaul of its platform and the fact that it is less mature than that of Next.
Moody’s also compared the two companies’ property portfolios, noting that although M&S Simply Food has benefited from a shift towards convenience food shopping, Next is better equipped to cope with the changing in high street shopping habits thanks to its strong presence in retail parks.
The agency reiterated its Baa2 stable rating for Next and Baa3 for M&S.
“We expect both UK retailers to continue to benefit from a stable macroeconomic environment. However, the UK market will remain very competitive in the next 12-18 months with promotional activity continuing to exert pressure on profit growth. Although Next has a stronger balance sheet, we expect M&S to generate stronger cash flow after shareholder distributions and to reduce its leverage,” Ernesto Bisagno, a senior analyst at Moody's and the author of the report, said.
Shares in M&S were down 1.2 per cent today while Next's share price fell 1.66 per cent following reports this weekend that a US hedge fund has built up a short position in the company since the start of the year.
Lone Pine's has taken a short position of 0.6 per cent worth around £60m in Next, according to The Sunday Telegraph, a year after taking a £100m bet against M&S.
The high street bellwether, which has long been one of the strongest performers on the high street, sounded the alarm bell this Christmas as the warm weather and high levels of discounting took its toll on sales across the sector.
Chief executive Simon Wolfson also warned profits will be at the lower end of expectations, around £817m, when they are revealed in March.
M&S also reported dismal Christmas trading results as it struggles to revives sales across its clothing and homeware division. Chief executive Marc Bolland announced last month that he will step down this year.