Broker snap: UBS downgrades M&S, ASOS on margin concerns

18th Dec 2013 08:32

High Street retail group Marks & Spencer was trading in the red on Wednesday morning after analysts at UBS cut their rating on the stock from 'buy' to 'neutral', highlighting higher levels of promotional spend across the industry as of late."The clothing retailers look to have pressed the panic button this year as subdued real disposable income, weak footfall and warmer October weather have held back full-price sales," said analysts Andrew Hughes and Adam Cochrane."We think that reported like-for-like sales may hold up but the margin investment will be greater than originally expected with the economics of selling more volumes at a lower price not working in the retailers' favour," they said.Nevertheless, UBS believes that recent macro-economic data remains supportive for the 2014 outlook, with analysts saying they remain "positive on the extent and sustainability of the UK recovery"."The big drivers of consumer confidence and employment remain robust and lower petrol prices are doing much to offset higher utility bills to bring down headline retail price index. The recent strength of sterling is a welcome boost to our retailers and should more than offset the impact of rising Asian wages."However, the bank has cut its forecasts for M&S on the back of expected lower gross margins. The target price for the stock has been cut from 550p to 475p.ASOS has also been downgraded from 'buy' to 'neutral', though its target price has been raised from 6,000p to 6,200p after recent strength. Debenhams, meanwhile, is still rated 'buy' given that its current share price already prices in the majority of UBS' concerns, but the target is cut from 125p to 100p.In contrast, UBS said its preferred exposure is in the electricals/hardlines markets with Home Retail and Dixons (both rated 'buy') likely to have both benefitted from sales of tablets, televisions and small domestic appliances over the Christmas period. Halfords ('buy') has been the bank's favourite stock, though it noted that the recent weather is likely to have been unhelpful for its car maintenance division.BC