Next PLC (LON:NXT) is well placed to navigate the structural shift towards online and challenging markets as its strategy progresses, according to analysts at HSBC.
HSBC raised its recommendation on the fashion retailer to ‘buy’ from ‘hold’ and lifted its target price to 6,050p from 5,700p.
The bank said its investment case is supported by the potential for more share buybacks and an expected 3% dividend yield. Next said in September that it had returned £300mln to shareholders via share buybacks this year.
READ: Next shares slip as sales at retail stores fall further in third quarter
HSBC noted that Next’s third-quarter trading update was in line with estimates despite the impact of warm weather on autumn ranges, boosted by better-than-expected online growth.
“A recovery in apparel demand on the arrival of the cold weather in late October, together with cost reductions, has de-risked the 2019 fiscal year earnings outlook,” HSBC said.
“With 2019 pre-tax profit guidance unchanged, the focus shifts to 2020 and the potential for more share buybacks, supported by strong cash generation.
“While sector headwinds remain, Next is well placed to manage the structural shift to online and has hedged its USD sourcing exposure for 12-18 months, mitigating short-term Brexit-related foreign-exchange volatility.”
Next has been investing in its online platform, expanding its overseas business to include third-party brands and cutting costs in a bid to offset the downward pressure on sales at retail stores.
Bricks and mortar retailers in the UK have been hit by subdued consumer spending and online competition, leading to the demise of Maplin and Toys R Us and prompting other companies like House of Fraser and New Look to close stores.
In the third quarter ended October 27, Next said sales at its stores fell 8% but a 12.7% jump in online sales led to a total growth of 1.3%.
Shares rose 2.1% to 5,394p in mid-morning trading.