Deutsche Bank upgrades Next to 'buy'

Deutsche Bank upgraded Next to ‘buy’ from ‘hold’ but cut the price target to 6,850p from 7,200p following the company’s full year results last week.

It said the 15% drop in the share price leaves Next on a 7% discount to the sector which seems like an over-reaction.

DB said that while the results were in line with expectations, guidance for the year ahead was trimmed 3% on a more cautious consumer outlook.

Trends in the customer credit business also continue to be slightly negative and management expects this structural decline to continue, the bank noted.

“However, the underlying brand remains solid according to industry data, our new credit book sensitivity analysis suggests a c£8m per annum base case profit drag.”

The bank summed up its five reasons to be more positive on the retailer by saying: the brand remains strong; incremental avenues of growth offer attractive returns; the profit drag from the decline in credit customers is manageable; the balance sheet can allow more returns later in the year; the valuation is now more attractive.

In addition, it pointed out that on top of its UK fashion business, 20% of Next’s revenues are derived from the Home categories.

“This category provides more resilience against averse weather, modest exposure to the ‘catch-up’ spend in bigger ticket categories (if it does not fizzle out), and long term growth potential.”#

At 0911 GMT, Next shares were up 0.2% to 5,665p.