The margin and cashflow outlook for European fashion retailers has improved, RBC Capital said as it raised its target prices on a batch of stocks in the sector.
RBC said retailers’ margins and cashflows will be helped by less spending on store openings, an increase in free shipping thresholds and less capacity as a result of struggling retailers closing stores.
In the UK apparel sector, RBC’s preferred stocks are Next PLC (LON:NXT) and Primark owner Associated British Foods PLC (LON:ABF).
Next's digital push to reduce capex and boost sales
RBC maintained a ‘outperform’ rating on Next and raised its target price to 6,200p from 5,700p due to “slightly higher long-term sales assumptions and lower long-term capital expenditure assumptions” as the company moves its sales online and cuts costs by shutting stores.
READ: Next confirms 2019 profit decline as it tackles challenging retail market
“Next will report a first quarter trading statement on May 1, when we should see continued double-digit sales growth online, with retail like-for-like down mid to high single-digit, but an improvement on the run rate in the second half,” RBC said.
Primark to benefit from more negotiating power with suppliers
RBC also has an ‘outperform’ rating on ABF with a target price of 2,900p.
READ: AB Foods expects Primark’s first-half profit to be “well ahead” of last year
The broker said its conversations with suppliers in recent weeks suggest that apparel retailers have become more cautious in buying, so are acquiring stock closer to season.
“This should give international apparel retailers like Primark, Inditex and H&M more negotiating power and supports their margin outlook in H2 2019/H1 2020, despite foreign exchange headwinds,” RBC said.
Elsewhere in UK retail, RBC has raised target prices for Marks & Spencer Group PLC (LON:MKS), Kingfisher PLC (LON:KGF), WH Smith PLC (LON:SMWH), Dunelm Group PLC (LON:DNLM).
M&S food business to remain under pressure but clothing offer derisked
RBC kept a ‘sector perform’ rating on M&S but lifted the target price for 280p from 270p as it increased its pre-tax profit forecasts for 2019-20 by 2% on the assumption of a “stronger exit rate in March due to milder weather and a slightly improved UK consumer outlook”.
It expects the M&S food business to continue to underperform as the company seeks to improve its ranges and customer value for money perception.
RBC thinks the M&S tie-up with Ocado is unlikely to be material to the bottom line for several years and “while we see some longer term strategic benefits to the acquisition, we question whether a licensing deal would have been a more attractive risk/reward option and question whether M&S can retain the £70mln of targeted synergies by 2022 given potential need for price realignment”.
READ: M&S and Ocado cost savings key to making tie-up more attractive, says RBC Capital
More positively, RBC believes M&S has derisked its clothing offer by reducing its store footprint and focusing on full price sales.
All eyes on next Kingfisher CEO
For Kingfisher, RBC repeated an ‘underperform’ recommendation but increased its target price to 220p from 200p.
Last month, Kingfisher announced the resignation of chief executive Véronique Laury alongside a 52.8% drop in full-year pre-tax profit as its French DIY business Castorama continued to struggle.
READ: Kingfisher CEO Véronique Laury to leave as the B&Q owner posts slump in 2018 profit
“We have increased our fiscal year 2020-21 pre-tax profit forecasts for Kingfisher by 2% due to stronger than expected industry data for France and the UK recently, helped by strong seasonal sales versus very soft comparisons,” RBC said.
“We rate Kingfisher ‘underperform’ with a 220p price target as we think it will take time for the performance of Castorama France to improve, plus we see potential for a margin rebase under a new CEO.”
RBC lifts profit estimate on Dunelm after third quarter beat
RBC also kept an ‘underperform’ stance on Dunelm but hiked its target price to 750p from 650p, citing better-than-expected third quarter results.
READ: Dunelm shares rise as it predicts full-year profits will be “slightly ahead” of forecasts
The broker said third quarter sales were 4% ahead of its forecasts, prompting it to raise its 2019 pre-tax profit estimate by 4%.
“Dunelm is now showing more consistent top-line growth, with improved focus and execution, albeit valuation at 18x CY19 P/E is fairly high in its historic range of 12-20x and full in our view for what at present is a UK landlocked retailer,” it said.
WH Smith to deliver 'high single-digit' earnings growth per year
On WH Smith, RBC reiterated an ‘outperform’ rating and raised its target price to 2,500p from 2,440p.
It said the books and stationery retailer’s travel business, which includes stores at airports and train stations, beat expectations in the first half and made a good start to the second half.
READ: WH Smith lifts interim dividend as profits drop after acquisition of InMotion
“We maintain our outperform recommendation for WH Smith’s longer-term expansion story (now 70% of EBIT) which should enable it to drive at least high single-digit earnings growth per year,” RBC said.