Exane BNP Paribas has shown some kindness to poor Marks & Spencer this morning after generously upgrading its recommendation to “outperform”, sending shares up more than two per cent.
The French bank, which previously had an “underperform” rating on the stock, bravely argues that after three years of difficult trading and a history of underinvestment, this is changing. “Now is the time to look beyond recent troubles”, it concludes.
In a 39-page report, the broker sets out four reasons for why it believes profits will rise by around 40 per cent over the next three years.
- M&S’ investment in revamping its IT systems and a new web platform
- Step-changes the retailer has made to how is plans, sources, and merchandises
- M&S overseas expansion
- Growth in M&S food, benefitting from the shift in convenience food shopping
Net of £50m cost increases to deliver these gains, Exane BNP Paribas believes this underpins a £245m increase in group profit before tax over the next three years.
M&S has endured three years of difficult trading and profit declines. Operating margins have fallen to their lowest in a decade. Store re-fits and new product launches have proven to be false-dawns. In a fast-changing retail environment M&S has suffered from a last mover disadvantage and legacy of under-investment. This is changing. Life beyond recent investments is in sight.
An eCommerce solution is due to launch in the next 6 months. Within a year systems improvements to availability and merchandising will go live. Across 2015/16 the evolution of the supply chain will be completed. In our opinion these strike at the heart of recent difficulties. Fixing them drives a reversal in negative earnings momentum, and alongside growth in Food and International, drives a c.40 per cent increase in profit over the next three years.