City encouraged by general retail outlook

UBS maintained its neutral stance on Next, although it said it would place its rating under review given the upgrade to company guidance and the recent rally in the sector. Next reported like-for-like sales in retail down 2.3 per cent for its first quarter, ahead of UBS’s estimate of -3 per cent. Trading benefited from a later Easter, with Directory sales up 1.6 per cent, but home continued to struggle.

Next has experienced an increase of £15m in profit forecasts, with the consensus being £352m and UBS’s forecast being £360m.

Buy N Brown, advised Investec following the home shopping group’s results last week. The broker observed: “The overall tone of the preliminaries meeting was one of strong and prudent management exercising control over the business, especially with regard to increased bad debt provisioning.

“In contrast, the wider stock market – based on share price reaction on the day – appeared to be taking the news as confirmation that it was right to be concerned on the issue of bad debts.”

Home shopping group Findel’s house broker Singer fretted that the possible closure of schools if swine flu spreads could hit the retailer. Singer cautioned: “A handful of closures thus far in London could quickly spread to other regions and, being the dominant player in the educational supplies business,
Findel’s education division could be vulnerable to downgrade.”

KBC Peel Hunt upgraded Carpetright to buy. Last week’s update disappointed some analysts, but KBC argued: “Looking ahead, Carpetright remains one of the few retailers we believe has the capability to recover peak EBIT margins.” The broker increased its price target from 400p to 650p.

KBC was also encouraged by the latest GfK NOP consumer confidence data, which showed improved sentiment about personal finances. The broker said: “This is generally a good lead indicator for retail sales performance, supporting the better than expected trading performance of the sector over the year to date and providing no reason to expect sales to drop away in the short term.”

The Government’s trade credit insurance top-up scheme revealed in the Budget provides a lift for retailers’ working capital requirements, said Seymour Pierce. “Complete withdrawal or partial reduction in trade credit insurance has become a growing concern over the course of the downturn,” the broker said.

Pali International increased its HMV target price by 20p to 145p after last week’s update, but retained its neutral stance. The broker said investors are partial to HMV’s “last man standing” entertainment positioning and ventures such as the move into live music, but noted the valuation is “pretty full”. Pali saw more upside in the “lowly rated” Game and WHSmith.