RBC expects Next to beat forecasts, upgrades to 'outperform'

Even after raising its growth guidance for fourth-quarter full-price sales in a trading update on 30 October – from 2.5% year-on-year to 3.0% – RBC said it sees further upside risk as a result of increased UK marketing spending and softer comparatives with last year due to mild weather in December 2023.

"Meanwhile we expect NXT to continue to benefit from its structural advantages of: 1) relatively fast, highly automated logistics 2) a very broad range, particularly online, with attractive service options and 3) a very well-developed customer base," the broker said.

In addition to UK consumer concerns and a weaker pound, higher staff costs have dampened Next's stock recently, owing to recent changes to the UK minimum wage and how much employers need to pay for National Insurance.

"However we think much of the wage rise is likely to be recycled back into the sector and we think NEXT will look to offset staff cost rises with small price rises next year in the order of 1%," RBC said.

Meanwhile, strong growth in the online overseas business, which accounts for 15% of total sales, should help to re-rate the stock, the broker added.

Next's shares trade at 13.5 times forward earnings, but RBC believes the stock warrants a higher rating due to stronger anticipated top-line growth than its historical average of 2%.

The broker has placed a 10,800p target price on the stock, which assumes a price-to-earnings ratio of 15x. If the stock were to re-rate to a PE of 17x, the shares should hit 12,200p, it said.

The stock was more or less flat at 9,844p by 1118 GMT.