M&S tipped for upgrade at upcoming City briefing

Expectations that Marks & Spencer Group (LSE:MKS) will upgrade a key margin target when it holds a City briefing next month today inspired a fresh surge of interest in the retailer.

Shares rallied another 6.8p to 378.7p, their highest level since 2016 and representing a rise of 37% so far this year as one of the top-performing stocks in the FTSE 100 index.

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According to Deutsche Numis, the re-rating momentum of M&S appears to have further to run after the bank lifted its price target from 350p to 430p.

Its move earlier today comes after UBS recently initiated coverage at 435p, and US bank Jefferies went for 410p as it expects the chain to appear on the radar of more international investors.

Deutsche Numis analyst Adam Cochrane said: “M&S is continuing to get it right.

“Data points support a strong performance continuing in Food, an acceleration in Clothing and the Ocado Retail joint venture is supportive with double-digit percentage sales growth.”

His improved target comes ahead of a big month for the retailer, with interim results due on 6 November and its capital markets event on 12 November.

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While the half-year figures may not provide fireworks, Cochrane expects the City briefing to include an upgrade to the margin target in clothing. He also sees an increased focus on the international opportunity, an area that has provided recent upside for Next (LSE:NXT).

At last year’s capital markets day, M&S outlined its intention to add a percentage point to its market share in both clothing and food by 2028. A 4% or more food operating margin and one above 10% in clothing and home were also highlighted.

The 2023 briefing, which took place at the same time as the retailer confirmed the post-pandemic return of dividend payments, triggered a 9% jump for shares.

Despite a 90% jump already that year, broker Peel Hunt said after the presentation that M&S remained “chronically undervalued” as it backed the shares to reach 300p. It described the management “as impressive a unit as we have seen at the company in years, possibly ever”.

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Demand has benefited from an upturn in the UK economy and the return to growth of real wages, which at 2.9% compares with 2.1% in Europe and 1.3% in the US.

UBS said recently that the market is only factoring in near-term momentum and that the retailer’s structural outperformance is likely to be more visible by the time of the capital markets event in mid-November.

M&S trades on 13 times the bank’s forecast earnings or 10.5x excluding its Ocado food joint venture. As this compares with Next on 16 times and Tesco (LSE:TSCO) on 14 times, UBS suggests there’s room for a further re-rating with continued execution.

Jefferies expects profits growth of 10% this year and 7% in the following year, with next month’s interim results set to show another period of sustained market share growth.

Jefferies’ forecast is for a 5% year-on-year rise in half-year adjusted profits to £367 million, compared with the City consensus of £358 million and 2022/23’s £205.5 million.