Berenberg downgrades Next, says structural pressures not priced in

The bank, which lifted its price target on Next to 4,500p from 4,300p, said the company has a best-in-class management team. However, it also thinks the Covid-19 pandemic has intensified structural pressures and said these do not appear to be captured in the current valuation, with the share price currently above that of summer 2019.

"In particular, we expect the ongoing channel shift to put pressure on the retail division’s like-for-like sales and margins," Berenberg said. "While we think there is an opportunity for its label business to take market share, we also believe the attractiveness of Next’s delivery and returns proposition is diminishing, given prevailing footfall trends.

"Its credit customers may, furthermore, have a lower appetite for debt due to the greater systemic risk of a post-Covid-19 world."

On the sector overall, Berenberg said the pandemic should result in a sustainable step-change in online penetration, which helps to underpin Asos and Global Fashion Group as its top picks.

Berenberg said it expects buy-rated online fashion retailer Asos to end FY 2020 with its strongest-ever balance sheet, providing it with the firepower to take a more aggressive inventory stance over the coming year, which should support top-line growth.

"We also expect efficiencies arising from recent investment into international distribution centres, as well as non-strategic cost savings, to restore its EBIT margin to a sustainable 4%-plus by FY 2022, generating a return on invested capital of 14%."

The bank said its buy on Associated British Foods may seem "somewhat counterintuitive" given its view of the sustainable step change of channel shift.

"However, we believe this is priced in, with the company trading at a circa 20% discount to history," it said. It added that Primark can benefit from the subdued macroeconomic outlook and said that given ABF’s "rock-solid" balance sheet, it should be one of the first retailers under its coverage to reinstate its dividend.

Berenberg retained its ‘sell’ rating on Zalando.