Credit Suisse downgrades Next on margin attrition

It said that while the fourth quarter showed how well managed Next is and the resilience of the brand, it sees no end to the gradual margin attrition, which is likely to accelerate in future years as FX turns negative, eventually impacting cash generation.

"While the shares trade in line with UK peers on 11x 12-month forward price-to-earnings, with four-year earnings per share growth of 2.3% per annum we see little upside, given concerns over UK consumption and much better value elsewhere in the sector in categories and stocks with structural growth, i.e. online (Asos/Zalando), discount (B&M/Primark) and sporting goods (Adidas/JD Sport)."

Credit Suisse said 2018/19 will see the third consecutive year of sales decline and margin decline for Next Brand in the UK. It expects margin declines of around 100 basis points a year, driven by the store estate, which could now accelerate as marginal stores lose footfall from peer closure, resulting in accelerated downsizing and margin pressure from the de-leverage channel shift.

The bank reckoned that Next's £300m per year buyback will start to be cut in 20/21, threatening the 4.2% per annum contribution to EPS.

At 1505 GMT, the shares were down 2.7% to 4,630p.