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Next weak as Credit Suisse cuts stance to ‘underperform’ from ‘neutral’ following recent trading update

Credit Suisse’s analysts noted that Next is expecting a gradual decline in margins which is likely to accelerate in future years as currency factors turn negative
Next store sign
The Swiss bank reduced its price target for the FTSE 100-listed group to 4,800p from 5,800p

Credit Suisse gave a knock to Next PLC (LON:NXT) on Monday, downgrading its rating for the clothing retailer to ‘underperform’ from ‘neutral’ following a recent trading update.

The Swiss bank reduced its price target for the FTSE 100-listed group to 4,800p from 5,800p with the shares currently trading at 4,625p, down 2.8% on Friday’s close.

READ: Next shares jump on well-received Christmas trading update

In a note to clients, Credit Suisse’s analysts noted that although Next’s Christmas trading performance surprised on the upside, the high street stores group was cautious on the outlook, expecting a gradual decline in margins, which is likely to accelerate in future years as currency factors turn negative.

The analysts pointed out that Next Brand’s margins have fallen by 400 basis points (bp) over the past three years and they expect this decline to continue at around 100 bp per annum over the next few years.

They said they believe the gradual decline in margins will eventually put pressure on Next’s cash conversion and debt metrics, and the analysts assume that the group's share buybacks will start to be cut in 2020/2021.

The analysts concluded: "While the shares trade in line with UK peers on 11x 12m FWD PER, with 4Y EPS growth of 2.3% pa we see little upside, given concerns over UK consumption and much better value elsewhere in the sector in categories and stocks with structural growth".

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