(The following statement was released by the rating agency)
LONDON, May 22 (Fitch) This announcement corrects the version published on 21
May 2013, which incorrectly stated some of the Rating Sensitivities.
Fitch Ratings has downgraded UK-based retailer Marks and Spencer Group plc's
(M&S) Long-term Issuer Default Rating (IDR) and senior unsecured rating to
'BBB-' from 'BBB'. The Short-term rating has been affirmed at 'F3'. The Outlook
on the Long-term IDR is Stable.
The downgrade reflects M&S's weakened business risk profile as highlighted in
its FY13 (financial year ending 30 March 2013) results with a 3.5% drop in group
underlying operating profit. FY13 operating performance has been negatively
impacted by its general merchandise (GM) division due in part to continued
market share loss in womenswear, adverse weather conditions in May 2012 and
internal merchandising issues (stock shortages) in Q113. This is also reflective
of a difficult consumer environment and the structural changes affecting large
UK clothing retailers.
These structural challenges include competition from value clothing retailers
such as Primark and the supermarkets, the growth of multi-channel retailing, the
intensity of promotional activities and the fact that consumers are less loyal
to brands/retailers, switching between retailers for better promotions or deals.
The Stable Outlook reflects strong credit metrics and sufficient cushion at the
current 'BBB-' for M&S to turnaround its weakened business profile especially in
its GM division and for any further underperformance given the expected weak
consumer environment in its core UK market and international markets.
The ratings continue to reflect M&S's leading market position in the UK clothing
sector and its niche position in food.
KEY RATING DRIVERS
General Merchandise Execution Risks:
The key challenge for M&S remains the successful execution and improvement of
its UK GM division (46% of UK group sales). M&S has suffered eight consecutive
quarters of declining GM LFL sales since Q411 (quarter ended March 2011) with
Q113 (quarter ended 30 June 2012) being the steepest at 6.8%. M&S's core GM
segment, womenswear has been losing market share to value retailers,
supermarkets and other clothing peers. M&S has since appointed a new management
team to put GM performance back on track and has also invested in operational
improvements to the business.
However, the combination of a challenging UK consumer environment coupled with
the changes made by the new GM team in M&S will mean that any material
improvement is likely to be slow. M&S's new multi-channel platform will only be
launched in spring 2014. Fitch does not expect a meaningful recovery until 2014
when the GM team has had an opportunity to influence a full year of collections
Declining Operating Margins:
M&S operating margins has been on a declining trend since FY09. Operating margin
was 8.5% in FY09 and it is expected to be around 7.8% in FY13. This is due in
part, to the reasons mentioned above regarding the GM division but also as food
contributes more to group revenue and profits. The food division contributed
about half of group sales in FY07 but it is now 54% of group sales in FY13.
However, its gross margins are lower at 31.7% compared with GM of 51.8% in FY13.
Positive Food Development:
The food division continues to generate stable positive LFL sales growth since
Q310. Food accounts for 54% of total group sales in FY13. FY13 benefitted from a
strong performance in Christmas 2012, supported by its innovation, quality and
provenance credentials and extended winter weather in 2012/2013. Fitch expects
this positive development to continue in the food division given management's
track record and focus on innovation and quality.
Fitch expects M&S's credit metrics to remain stable over the next 18 months.
M&S's credit metrics are strong at 'BBB-' and it has a substantial owned
property portfolio compared to peers. M&S has solid financial flexibility with
the ability to pull different levers to focus on cash flow and the maintenance
of credit metrics. Lease-adjusted net debt/EBITDAR is expected to be around 3.3x
and funds from operations (FFO) fixed charge coverage to be around 3.5x in FY13.
Positive: Future developments that could lead to a positive rating action
- An improvement in LFL sales growth relative to its peers
- Stabilisation of its market share in womenswear
- Sustained group EBIT margin above 8%, mainly reflecting the success of the
turnaround of M&S's GM division
- FFO fixed charge cover sustainable at or above 3x
- Lease adjusted net debt/EBITDAR below 2.8x or FFO adjusted net leverage below
Negative: Future developments that could lead to a negative rating action
- Group EBIT margin decreasing to below 7% due to continued price investments
and M&S's inability to maintain cost pressures
- Continued loss of market share in womenswear
- FFO/fixed charge cover below 2.5x
- Lease-adjusted net debt/EBITDAR increasing to above 3.5x or lease-adjusted net
debt/FFO increasing to above 4.0x
- The emergence of shareholder pressure for shareholder-friendly measures
+44 20 3530 1465
Ching Mei Chia
+44 20 3530 1068
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
+44 20 3530 1021
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
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