Next PLC (LON:NXT) saw its shares top the FTSE 100 leader board on Tuesday, carrying over last week’s post-Christmas trading update strength, as HSBC repeated its ‘buy’ rating on the retailer’s stock, saying the market “undervalues Next’s relative strategic advantages”.
In a note to clients, the global bank’s analysts pointed out that the market is applying little or no value to Next’s Retail operations, albeit which is consistent with management’s long-range Store Stress Test that they believe outlines ‘worst case’ cash flow predictions for the business.
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However, the HSBC analysts said: “We believe that this undervalues both the strategic relevance of Retail Division as a driver over Online sales growth (c50% of online orders are click and collect).”
They added that they also considered that the Store Stress Test predictions are “by their very nature, too cautious given the cost/efficiency saving potential attached to an attractive lease expiry profile, rent reductions and sales transfer from closed stores.”
The analysts said they believe this flexibility leaves Next well placed relative to its peer group to manage the transition of sales to online. They also see potential for Next to take market share through sector capacity withdrawal.
Online platform modernisation
The HSBC analysts pointed out that the modernisation of Next’s online platform – around 45% of sales and 50% of EBIT - that started three years ago has allowed the retailer to broadly offset the downward pressure on Retail sales and profits.
They said: “We see potential for Next as the default ‘marketplace’ of choice for UK apparel online.”
Against the backdrop of a tough fourth-quarter, last week’s update showed total sales at Next in the 9 weeks to 29 December rise by 1.5%, in line with expectations, with strong sales in the final three weeks of the period.
The HSBC analysts noted that Next’s management trimmed their full-year 2019/20 pre-tax profit forecast to £715mln, around 1.4% below consensus based on at continuation of trading environment seen in the second half of 2018/19.
In response, they reduced their pre-tax profit forecasts for Next for the full years from 2019-2021 by 1%-3% leading it to reduce its target price for the stock to 5,900p from 6,050p.
That target remains well above current share price levels, with Next shares currently changing hands at 4,843p, up 5.9% on Monday’s close having jumped by over 10% in the past week.