May 22, 2013 / 4:37 PM / 5 years ago

Correct: Fitch Downgrades Marks and Spencer to 'BBB-'; Stable Outlook

(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 or sales. 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. Credit Metrics: 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. RATING SENSITIVITIES Positive: Future developments that could lead to a positive rating action include: - 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 3.3x Negative: Future developments that could lead to a negative rating action include: - 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 Contact: Principal Analyst Roma Patel Analyst +44 20 3530 1465 Supervisory Analyst Ching Mei Chia Director +44 20 3530 1068 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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 the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at Applicable Criteria and Related Research: Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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