Goldman Sachs downgrades Next amid industry headwinds

Goldman Sachs downgraded retailer Next to ‘sell’ from ‘neutral’, slashing the 12-month price target to 5,000p from 6,400p, highlighting limited upside relative to peers.

“We expect the structural headwinds that are facing apparel retail from online channel-shift and trading down to stall Next’s EBIT growth,” the bank said.

Goldman also said the recent negative combination of declining UK average selling prices (trading down activity) and the early signs of declining apparel volumes, increase the chances that UK apparel demand could deteriorate further, rather than recover this autumn/winter.

Due to its more cautious view on Next’s earnings growth outlook, given the structural headwinds from increased online discount and international retail capacity, the bank has cut its target EV/EBIT multiple to 9x FY18E from 11.5x, in line with the group’s 10-year average. This is equivalent to an 8% free cash flow yield and drives the price target downgrade.

“We expect stalled Next Brand LFL gross profit trends from here, with any material growth only coming from the international online and the label businesses,” the bank said.

Next shares were down 1.8% to 5,020p at 1152 BST.