Investors were putting their Next Plc (LON:NXT) shares back on the shelves this morning after Morgan Stanley downgraded the high street retailer to ‘underweight’.
Next shares are up almost 40% over the past three months and analysts at the US investment bank think that recovery is “overdone” given that, in their view, the core business is deteriorating.
“We believe that Next has been running up a proverbial down escalator for some time and there is growing evidence to suggest that it is finding this increasingly difficult to do,” read this morning’s note.
“For many years Next was able to offset declining sales densities in retail with gross margin increases.
“However, with gross margins up more than 1000bps over the last decade or so, and LfLs down ~11% in FY H1, this strategy may have run its course.”
The MS team added: “Directory fundamentals look healthier to us, but we think it concerning that sales in the core UK Next Directory business are also now beginning to fall, suggesting to us that the Next customer proposition may be losing resonance with UK consumers.”
Unlike some of its fellow bears who are expecting profits to collapse in the not-too-distant future, Morgan Stanley still believes Next will be “very profitable and very cash generative” over the next few years.
The analysts moved their rating down to ‘underweight’ – a ‘sell’ to you and me – but said they “remain comfortable” with their target price of £43, almost 15% below the current market value.
Shares are down 2% this morning to £50.10.