Next PLC (LON:NXT) is set to report a healthy recovery in full price sales at its first-half results on Tuesday but its valuation remains hostage to UK economic uncertainty, according to Jefferies.
Jefferies repeated a ‘hold’ rating on the stock but cut its target price to 5,600p from 6,100p, citing a “more depressed valuation context for UK discretionary consumer exposure”.
READ: Next sales lifted by hot weather but shares fall as results miss market forecasts
In a second-quarter trading update in August, the company said full price sales increased 4.5% in the first half, with online sales up 15.5% and retail sales down 5.3%.
A good run of hot weather in the UK boosted demand for its summer ranges in the second quarter while the first quarter was flattered by a poor performance the previous year.
Next maintained its estimate for 2019 financial year pre-tax profit of £717mln, a 1.3% decrease on the prior year.
'Lack of visibility on Brexit and consumers still reluctant to spend'
Jefferies expects Next will keep its annual guidance unchanged at the company’s interims.
“On balance, we expect much less volatility around NXT's earnings expectations, as opposed to what is set to remain a much more wide-ranging valuation debate,” Jefferies said.
“We cannot help but think that the latter will remain, hostage of the impending Brexit process, at a time when UK consumers are still reluctant to spend, given a lack of visibility as we approach March 2019.”
The broker has forecast first-half earnings (EBIT) growth of 4% with retail EBIT down 21% and its catalogue business Next Directory up 15%. It sees pre-tax profit of £320mln for the period with earnings per share receiving a 7% lift from share buyback activity.
Next returned £300mln of surplus cash to shareholders via share buybacks earlier this year.
For the second half, Jefferies predicts sales growth of 2.3% with EBIT down 3.7%.
Jefferies lowers pre-tax profit forecasts
Jefferies cut its estimate for 2019 pre-tax profit to £721mln from £731mln and lowered its forecast for the following two fiscal years.
“Our forecasts are fractionally trimmed at PBT level as we reflect the impact of reducing average basket size at Directory (an industry-wide phenomenon as customer ordering continues to move to a mobile interface),” it said.
The growing shift towards online shopping has prompted a number of bricks and mortar retailers to close down stores. Next closed 14 stores last year and has said it plans to shut a further 10 small stores this year.
Jefferies said: “One would expect ongoing shrink in industry selling area to be matched by a corresponding reduction in the supply of stock (even if in the past assuming increased discipline in buying decisions has often proved optimistic)”.