Global ratings agency Fitch has downgraded Marks & Spencer’s (MKS) long-term credit rating to junk status as the coronavirus lockdown exacerbates “historical operating weakness”.
Fitch downgraded M&S’ senior unsecured debt rating to BB+, one notch below investment grade, and its short-term ratings to B from F3.
The ratings agency said the downgrade reflected the further impact the coronavirus pandemic – and a partial lockdown of M&S operations – would have on the company’s “historical operating weakness” in its clothing & home division.
Fitch also highlighted the risks stemming from its ongoing programme of modernisation of the clothing range, improvement of logistic functions and store closures.
However, the new rating has a stable outlook, given M&S’ adequate liquidity to withstand the current period of business disruptions, along with the positive organic growth anticipated for the food division.
Fitch anticipates M&S’s EBIT margin will fall to just 2% in the year to March 2021, from 5.5% in the current financial year due to a likely prolonged lockdown in the UK.
These forecasts incorporate the expectation of two to three months of forced closures for clothing & home stores in the first quarter of 2021, leading to a sharp decline in FY21 sales (–8.4%), followed by a slow and gradual economic recovery, with M&S’s sales returning to the level of its 2020 financial year by the end of 2021.
“While the food division continues to operate during the lockdown, we assume C&H stores/space will remain closed for two to three months in the UK and abroad and will then suffer from lower consumer spending,” Fitch explained.
It assumes this will contribute to a reduction of C&H sales by 27% in FY20, only partially offset by online sales.
It expects M&S Food sales to post mid-single digit organic sales growth in 2020.
“While we believe M&S Food has benefited less than other retailers, given the high share of chilled and food with a limited shelf life, the company’s sales will start benefiting in 2H21 from the launch of the online delivery service joint venture with Ocado,” Fitch stated.
M&S’s debt rating was cut to ‘junk’ by fellow ratings agency Standard & Poor’s on 26 March.
M&S shares are down 49.3% so far this year and are down by 58.7% year on year.
No comments yet