It was a bad November for the retail sector but Next PLC (LON:NXT) still delivered strong sales over the Christmas period, Liberum said as it upgraded the stock.
Liberum raised its rating on Next to ‘buy’ from ‘hold’ and left its target price at 6,100p after the fashion retailer posted a 1.0% increase in full price sales from October 28 to December 29.
Next cut its full-year profit guidance by 0.6% to £723mln, due to sales of more lower margin personalised gifts and beauty products as well as operational costs associated by a higher level of online sales.
READ: Next shares jump on well-received Christmas trading update
But Liberum said Next did well given the struggles facing the retail sector from weaker consumer confidence and tough online competition.
“Full price sales are in line with expectations (+1.0%) and pre-tax profit guidance has been nudged down, which we think is an excellent performance considering how bad November was for the sector and the scale of the downgrades we have seen elsewhere in fashion and clothing,” Liberum said.
“We nudge down our earnings per share forecasts following today’s update (-0.4% in 2019 and -1.6% in 2020) but today’s announcement leaves the shares looking oversold.
“Next currently trades on a 2019 price-earnings of 9.3x, which we think is too cheap given the balance of a strong balance sheet and good cash generation with an 8.2% free cash flow yield.”
Analysts had managed their expectations ahead of Next’s trading update following a shock profit warning from online retailer ASOS plc (LON:ASC) last month. ASOS said it had seen weak trading in November, a key month for the group as it includes Black Friday sales.
Liberum said Next’s strong sales in the three weeks before Christmas and a good half-term holiday week at the end of October made up for a weak November.
In morning trading, shares rose 4.5% to 4,318p.