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LONDON (Alliance News) - Improved profitability at Marks & Spencer Group PLC has narrowed the gap between itself and rival Next PLC, but Next's credit profile remains stronger, according to a report by ratings agency Moody's.
According to Moody's, M&S has improved the profitability of its general merchandise business as a result of more direct sourcing from suppliers, narrowing the gap between itself and Next. However, Next's credit profile will remain stronger over the next 12 to 18 months as its "superior" logistics process will drive higher margins and sales growth than its competitor, Moody's said.
"Next's credit profile will remain stronger than M&S' in the next 12 to 18 months due to its superior margins, which are driven by a combination of solid brand recognition, a premium online distribution channel and tight cost control," said Ernesto Bisagno, a vice president and senior analyst at Moody's and the author of the report.
"However, M&S has recently narrowed the gap by increasing direct sourcing, resulting in a strong improvement in general merchandise profitability," he added.
According to the ratings agency, M&S is growing more rapidly in its online business thanks to infrastructure investment and a lower penetration rate, but Next's organic growth and new store openings will drive faster sales than M&S overall.
Moody's said that of the two retailers, M&S has greater earnings diversification because of its specialty food business, which contributes approximately 45% of its total UK gross profit and which has posted 25 consecutive quarters of positive organic growth, outperforming supermarket peers Tesco PLC, J Sainsbury PLC and Wm Morrison Supermarkets PLC.
M&S's chain of small and medium-sized shops also has benefited from the growing trend of UK consumers to use convenience stores for food shopping, Moody's said, although slower organic growth is expected in the next 12 to 18 months as a result of fierce competition in the UK grocery market.
On the other hand, Next's network of large-format stores make it better equipped than M&S to cope with changing consumer habits in clothes shopping, which has seen increased footfall at retail parks at the expense of high-street outlets, Moody's added.
The ratings agency noted that both retailers are exposed to foreign exchange rate volatility given that most of their products are sourced overseas, which could weigh on margins in financial 2017. To mitigate this, Moody's expects both companies to reduce freight costs and negotiate price reductions with suppliers.
"Next will be better able to pass on adverse foreign exchange effects through modest price increases because its prices are generally lower than M&S'," Bisagno said.
Shares in M&S closed down 2.0% at 407.10 pence on Monday, while Next shares closed down 2.9% at 6,430.00p.
By Karolina Kaminska; karolinakaminska@alliancenews.com @KarolinaAllNews
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