Ratings agency Moody's has confirmed the downgrade of Marks & Spencer to Ba1 from Baa3, saying that the retailer is likely to face 'uncertain demand levels' in the coming months, most notably in its Clothing & Home business.
The rating action concludes a review for downgrade initiated by Moody's on 26 March.
Multi-Year Trend
Making its assessment, Moody's says that the coronavirus epidemic has compounded the 'existing pressure' on Marks & Spencer's credit quality, 'driven by a multi-year trend of weak underlying sales trends and declining profitability'.
It said that the retailer is exposed to a 'very competitive' UK retail market, and is likely to be impacted by weak consumer sentiment and a muted macroeconomic environment in the coming months.
On the positive site, however, Moody's said that the Ba1 rating reflects the company's 'enduring strong market positions', as well as the range of initiatives put in place by chief executive Steve Rowe and his team to turn the business around.
Moody's also said that it expects 'continued solid demand' within the M&S Food business, but noted the 'additional diversification of risks' that the International division provides.
Profit Outlook
Marks & Spencer has withdrawn its fiscal guidance for the coming year, ending in March 2021, and Moody's believes that the company's fiscal 2021 results will 'likely be better than implied in the company's COVID-19 scenario'.
It anticipates the business to report EBITDA of around £800 million for the year, or around a third lower than in its most recent financial year. By fiscal 2022, this could rise to around £1 billion, with positive free cash flow of around £200 million.
Moody's also said that it expects the Clothing & Home business, as well as its International arm, to 'recover somewhat' in fiscal 2022, ' helped by gradual improvements in execution, but to remain lower than the underlying pre-crisis levels'.
M&S' Food business is likely to see 'continued progress' in the coming years, while the 'closure programme in respect of the tail of weakly performing full-line stores, will all help support profitability', Moody's said.
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
