Next gets a boost as RBC upgrades to 'outperform'

Retailer Next got a boost on Thursday as RBC Capital Markets upped its stance on the stock to ’outperform’ from ‘sector perform’ and hiked the price target to 5,500p from 4,800p.

The bank said its proprietary entry price point pricing survey suggests Next has become more price competitive, in particular versus the likes of competitors M&S and Debenhams.

It pointed out that Next now ranks slightly below sector average in its entry level apparel pricing. For Spring/Summer 2018, Next has lowered its prices in both womenswear and menswear and broadly maintained its prices in kidswear, in which it is the market leader.

“Historically, Next’s LFL sales performance has had a good correlation to its relative pricing proposition to M&S. Given that Next is now less expensive than the market, this should be supportive for stronger sales growth, particularly for Directory.”

In addition, RBC reckoned that recent strength in the pound against the dollar could lift Next’s gross margin earlier than peers.

“Next typically hedges 9-12 months out in advance, shorter than M&S and Debenhams, who hedge 12-18 months out in advance; as such Next should realise its margin benefit a quarter earlier,” said RBC, noting that Next sources around 70% of its cost of goods sold in US dollars.

“All else being equal, we estimate Next could see a theoretical 130-300 basis points of gross margin tailwind from FX for FY19/20E. We believe some of this margin gain will be offset by higher cotton costs, mix dilution, as well as the need to invest in its product and online propositions, but we now believe Next can sustain its margins rather than seeing a decline.”

At 1350 GMT, the shares were up 1.8% to 5,002p.