Skip to main content
  • rainbow over text: 'thank you NHS'
  • Register
  • Help
  • Contact us
  • Log out of your HL account

M&S - relaxes agreements with lenders

Sophie Lund-Yates, Equity Analyst | 28 April 2020 | A A A
M&S - relaxes agreements with lenders

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Marks & Spencer Group plc Ordinary 25p

Sell: 99.06 | Buy: 99.40 | Change -2.94 (-2.92%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Marks & Spencer said Clothing & Home is being severely affected by coronavirus, and believes trading will be highly uncertain during a prolonged exit from current lockdowns.

Food trading has been adversely affected by lockdown due to the closure of cafes and slowdown in travel and some city centres.

The group has arranged for the financial agreements set by its lenders, known as covenants, to be relaxed until September 2021. M&S is eligible to take part in the government's Covid Corporate Financing Facility.

As previously announced there will be no dividend this year, saving around £210m and M&S will outline the "very significant" measures being taken to reduce costs and preserve cash flow at full year results on 20 May.

The shares were broadly flat following the announcement.

View the latest Marks &Spencer share price and how to deal

Our view

COVID-19 has already caused swathes of global retail closures and the impact on footfall is likely to get worse before it gets better.

That's having a severe impact on M&S' Clothing & Home business. Not only is the top line under strain, but margins are going to be hurt. If less stock is shifted M&S will need to slash prices in order to sell it at a later date.

This could be a particularly painful development because the Clothing & Home business has been struggling for a while, and having a knock on effect for the whole group. Stifling competition in the sector combined with burdensome costs of maintaining a store estate are a chain round the group's ankles and hurt profits.

News of a 12 month holiday from paying business rates, and relaxed rules from its lenders is very welcome, but these temporary breathers aren't a long term solution to the wider challenges.

In the group's defence it's trying to fix itself up, and is in the midst of its latest turnaround. The problem is the emergency pause to spending because of coronavirus will slow progress here.

It will be important to keep an eye on the group's debt position too. If there's a worse-than-expected impact on group cash flow, M&S will find it harder to make its interest payments.

The food business is coming under pressure too. M&S' food offering is very different to the bigger supermarkets - it relies more heavily on travel and city centre footfall. With so few of us now nipping into the sandwich aisle in motorway service stations, or on our lunch breaks from the office, it's hurting performance.

But some promising foundations are being laid. The Joint Venture (JV) with Ocado, where M&S food products will be available on Ocado's website later this year, is on track. As millions of us are likely to lean more heavily on delivery options even after lockdowns are lifted, we think this puts M&S in a good position. Given the deal had a price tag of £750m, and was funded by a dilutive rights issue, there's certainly pressure for it to pay off.

It's a very mixed bag at M&S. There are some very real challenges ahead in the Clothing business, and we don't yet know what the longer-term damage will be from the disruption to trading. As has become a bit of a market mantra, the extent of the damage will depend how long lockdowns last, and how impaired footfall is once we're allowed out.

Signup for updates on Marks & Spencer

COVID-19 trading update (20 March 2020)

M&S has said the COVID-19 outbreak will have a severe impact on the Clothing & Home and international businesses over the next 9-12 months.

In Clothing & Home margins are expected to be significantly impacted. That reflects the anticipated large amounts of unsold stock and the subsequent discounting expected to clear these items. M&S think its position as a go-to shop for staples, rather than seasonal fashion could help mitigate this a little as it will be able to bring forward some stock.

Normal trading is not assumed to resume by the autumn, and the group is preparing for the possibility of some temporary store closures.

Food trading has been stronger, and this division is expected to trade profitably throughout the disruption.

The division isn't experiencing a sales uplift on the same scale as other supermarkets because of its bias towards fresh food. However the shift as more people eat at home is expected to benefit sales in the months ahead.

Employees are being redeployed to the food division from Clothing & Home.

The International business will see significant reductions in sales, reflecting virus outbreaks, closures and lockdowns in some markets.

To cut costs M&S is lowering capital expenditure to around £80m from a budget of £400m. Non-essential spending is being reduced, including freezing recruitment and lower marketing spend.

The clothing supply pipeline is also being reduced by £100m.

The group has access to £1.1bn of undrawn credit. Together with other facilities including cash it has liquidity of £1.34bn.

Find out more about Marks & Spencer shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.