Following Marks & Spencer’s shock profit warning earlier this month, analysts lowered their expectations for Next. The City fears a like-for-like sales slide of about 5 per cent for the period, which would take the first-half decline to 7 per cent – the bottom end of the retailer’s expectations.
JP Morgan analyst Richard Chamberlain said Next is well-placed to benefit from increasing online sales of clothing and could continue to make gross-margin gains.
However, he warned: “Its strategy of increasing average selling prices – while necessary to move away from supermarket and discount competition – is difficult to execute well in a consumer downturn and there is a risk that it is not perceived by customers to offer value for money.”
Panmure Gordon analyst Philip Dorgan brought his Next price target down 50p to 800p, following M&S’s profit warning and the increased likelihood of downgrades. But he said: “Unlike the last recession, when Next went into losses (before extraordinary charges), its borrowings are secure and long-dated. We are not predicting Armageddon – just a lower share price.”
Next’s customers, like M&S’s, are likely to have been particularly hard hit by rising fuel and mortgage rates. Bernstein senior analyst Luca Solca said that the “middle ground” positioning of both retailers in the weaker environment would continue to be a challenge as customers shift towards cheaper or more specialised retail offers.
He added that, confronted by similar challenges, the pair are tackling them in different ways. M&S is apparently trying to protect market share, while Next is prioritising profits.
Next’s Directory business has been outperforming the stores strongly, despite the economic pressures. However, that growth may slow, partly because the retailer is being more careful about customer credit in the present climate.
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