Marks & Spencer suffers credit rating downgrade ahead of its full-year results

Marks & Spencer (M&S) will unveil its full-year (FY) results on Wednesday, with the retailer coming under scrutiny for its COVID-19 response after joining list of ‘junk’ investments by ratings agency Standard & Poor’s (S&P).

The British retailer isn’t alone on S&P’s ever-growing list of companies deemed risky for lenders, with the ratings agency stripping 24 companies of their investment grade status in 2020 amid the economic fallout from the virus.

In fact, the agency believes that it will likely be forced to downgrade as many as 111 companies to junk status this year, including the likes of British Airways, Virgin Money, ITV and fellow retailer Next.

Since the downgrade, M&S has a credit rating of BB+ which will likely increase its cost of borrowing, putting added pressure on the retailer amid a challenging trading environment.

The company’s balance sheet is also not on the most secure footing, with M&S holding around £1.65 billion worth of debt on its books.

Investors are eager for an update on the company’s performance on Wednesday and what steps its management will take to strengthen the financial well-being of the company.

M&S closed at 85p per on Tuesday.

COVID-19 will weigh heavy on retail sector, says Morgan Stanley

In a note to clients, analysts from Morgan Stanley explained why they believe the retail sector will be weighed down by the Covid-19 crisis for some time and are not convinced that an easing of lockdown restrictions will see retail stocks rebound.

‘We do not subscribe to the view that easing of lockdown measures represents the beginning of the end of COVID-19’s impact on the retail industry,’ Geoff Ruddell, equity analyst at Morgan Stanley, said. ‘Changes to consumers’ lifestyles, and thus their spending behaviour, are likely to last much longer.’

‘We expect social distancing measures, of varying degrees of severity, to continue until a vaccine has become widely available (hopefully in summer 2021),’ he added.

But analysts at Morgan Stanley remain optimistic about M&S, with the US-based investment bank upgrading its rating for the stock to ‘overweight’.

Morgan Stanley did lower its target price for the stock to 160p per share, but that still implies a potential upside of 86% based on where the stock closed on Tuesday.

M&S puts spring stock in hibernation

Most fashion retailers are stockpiling spring lines in preparation of massive stock clearance sales for when shops are allowed to reopen in June.

But in order to avoid participating in an all-out discount war, M&S and other large retailers like Next and Debenhams have instead decided to store a proportion of spring clothing and home products in warehouses until next year – in the hope that fashion trends haven’t moved on too much.

British retailer Next said that it had identified £330 million worth of stock from its season that could be 'carried forward' into 2021 - representing around 15% of its total stock for the spring and summer seasons in 2021.

‘This product is generally basic products, for example summer t-shirts and chinos,’ Next said in a statement.

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