Jefferies upgrades Next, downgrades M&S as it reviews retailers

Jefferies reviewed its ratings on London-listed retail stocks as it took a look at UK general retailers.

“Retailers are facing many headwinds in 2016/17 and the sector has already lost its PER premium, however, while Brexit and FX are known issues there's a growing unemployment fear risk and we expect consumer confidence to fall,” the bank said.

It noted that the UK General Retail index has fallen 8% year-to-date, underperforming the market by 8%, adding that the question is how much bad news the market is now anticipating for the likes of Next et al.

Jefferies said its consumer survey results suggest risk is still to the downside.

“We believe that rising fears of unemployment, combined with an increasing propensity to save and pay down debts, together with Brexit, exchange rate and interest rate uncertainty, is going to weigh on consumer sentiment and spending. One silver lining could be more favourable weather,” it said.

The bank upgraded Next to ‘hold’ from ‘underperform’ following the recent share price decline, which has seen the stock drop 30% since December following two profit warnings.

It highlighted a few reasons to be bullish on Next: investment in 2016 in an improved mobile offer; a more convenient delivery offer with third party parcel shops and an aim of two-hour delivery slots by January 2017; rising interest income for Next Directory and the stock’s valuation.

The bank downgraded Marks & Spencer to ‘hold’ from ‘buy’ despite a lower valuation.

It said the share price fall from 600p last summer to around 400p has been dramatic, as has the stock’s de-rating from nearly 17x forward earnings to around 11x.

Jefferies said general merchandise trading has regularly disappointed with Christmas sales being weak and market share data not showing much improvement.

In addition, the bank’s survey results show consumer perceptions of the quality of clothing and value for money not keeping pace with the industry.

It also pointed to increasing competitive pressure as more retailers move to a same day delivery promise or shorter time slots.

Jefferies cut Debenhams to ‘hold’ from ‘buy’ . It said that after an unexpectedly strong Christmas trading performance, Debenhams has been relatively resilient in 2016, down only 1%, though its PER struggles to break 10x, which is low by sector standards.

The bank has been bullish on Debenhams as it reckoned the stock was inexpensive and underappreciated and the company was making improvements to its omni-channel offer.

However, its survey results show that while Debenhams is broadly keeping pace with the competition for omni-channel improvements, it’s not doing much more in the eyes of customers.

Jefferies cut Dunelm to ‘hold’ from ‘buy’ on valuation. The bank had been a buyer of Dunelm as the company’s track record for gaining market share through the recession was impressive yet there was still an opportunity to double market share under the new management team .

Although it still reckons Dunelm is in a good place, it said changes will take time to come into effect, with the company launching a new format in September, and survey results showing room for improvement.

In addition, it said Dunelm was unlikely to escape macro-economic pressures, even if homeware holds up better than clothing.

Finally, it cut Poundland to ‘underperform’ from ‘buy’ saying it mistakenly upgraded the stock last summer thinking the buying and cost synergies from the approved 99p stores deal would lift the stock’s rating.

“In the absence of the deal synergies being much more than ‘at least £25m’ (and the company says they are going well) we now believe the market fully recognises the benefits of this deal.”