Next nearing end of the line on credit, Credit Suisse cautions

Analysts at Credit Suisse sounded a very cautious note on Next's trading over the medium-term, flagging to clients the rapid decline seen in the retailer's core profitability even as the outlook for its non-core units worsened.

Even with a £49.0m increase in profits before tax at its Credit, Label and International segments, the company still reported a full-year drop in earnings of £31.0m, as the core Next UK Brand saw a 12% fall as margins were eroded by 180 basis points.

Yet even that positive contribution would decline to £11.0m this year and was expected to negative in 2018, as credit income "rolled over", analysts Simon Irwin and Pradeep Pratti said in a research note sent to clients.

Account growth at credit was at multi-year lows and Core Directory margins (ex Credit, Label, International) had been declining for six years.

"And we see little change in the proposition which would alter that," they said.

"It is becoming increasingly hard to defend high market shares in a fragmenting apparel market, and we regard the decision to increase prices in a deflationary market as risk."

So while the broker increased its estimates for the company's earnings per share in future years by 2% it did not expect the bottom line to recover in later years, with further reductions in margins and cash conversion "inevitable".

Despite that, the change in the broker's numbers worked out to an improved target price of 4,250p, up from 4,100p previously. The recommendation on the shares was kept at 'Neutral'.