Nexts logistics process will help it remain stronger than M&S

Next's logistics process will help it remain stronger than M&S

More sourcing directly from suppliers has improved the profitability of Marks & Spencer's general merchandise business, narrowing the gap with Next Plc, according to a report published this week.

However, the research by Moody's Investors Service also notes that with most of their products sourced overseas, both companies are exposed to foreign exchange volatility. The ratings agency expects Next and M&S's foreign exchange hedges will only delay the impact of the stronger dollar, which could weigh on their margins in fiscal year 2016-2017.

To mitigate this effect, Moody's predicts they will 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's," says Ernesto Bisagno, a vice president, senior analyst and author of the report 'Peer comparison - Next's credit profile to remain stronger but M&S has narrowed the gap'.

Moody's also suggests Next's credit profile will remain stronger over the next 12-18 months as its superior logistics process will drive higher margins and sales growth than its competitor.

Although M&S is growing more rapidly in its online business thanks to infrastructure investment and a lower penetration rate, Next's organic growth and new store openings are expected to drive faster sales than M&S overall.

And while M&S has greater earnings diversification thanks to its specialty food business, which contributes around 45% of its total UK gross profit, Moody's forecasts slower organic growth over the next year due to fierce competition in the UK grocery market.

Meanwhile, Next's network of large format stores make it better equipped than M&S to cope with changing consumer habits in apparel shopping, which has seen increased footfall at retail parks at the expense of high street stores.