Next target price slashed

A share price target of £50 for Next, a level last seen in November, always did seem a stretch for the under pressure fashion retailer – let alone UBS's rather bullish aim of 5,275p, which would represent its highest level since mid-September.

After Thursday's annual results reflecting a "challenging" previous year led to cautionary comments from management, the broker has cut its seemingly over-optimistic target by more than 7% to 4,900p. This, it says, implies a calculated 2017 price/earnings (PE) ratio of 9.7 times.

UBS has always been sweet on the high-street bellwether, though, and continues to rate its shares a 'buy' – with its new price target still suggesting upside of almost 20% on its midday Friday price of 4,087p, down 2.6% since last night's close and steadily slipping.

Next reported retail sales slowing by 3% and operating profit by 16% to £339 million in the year to January, partially offset by Directory sales up 4.2% and operating profit up 10% to £444 million, reflecting consumers' preference for shopping online rather than instore. Total group sales were flat at £4.14 billion.

Meanwhile, earnings per share (EPS) fell just 0.3% due to a 1% boost from a lower tax rate and 2.5% fillip from share buybacks worth £188 million. The dividend was held flat at 158p.

Analysts Andrew Hughes and Adam Cochrane point out that Next has underperformed the wider market in 2016, and they expect this to continue into the first quarter due to underlying product and range issues, namely a focus on short-game, fashionable products and lack of attention on the everyday, staple products. "Although these issues have been fixed, they will not be reflected until Q2."

Therefore, the analysts reckon first-quarter sales will be at the low end of guidance before a recovery in the second quarter – and especially the second half - of the year. Further, they point to management's belief that the slowdown in clothing sales is cyclical rather than structural.

"Shifts in consumer spending patterns are not unusual and we expect that the trend will stabilise and reverse at some point," chief executive Lord Wolfson asserted. Though he does point out "it is impossible to say exactly when this will happen".

Next saw a 3.8% decline in full-year 2017 pre-tax profit and admits 2018's will be lower, in a range between £680-£780 million, though UBS thinks it will be somewhere in the middle at around £715 million – a further decline of almost 10%.

We were cautious yesterday, despite the massive positive reaction by investors. Our opinion hasn't changed overnight, and clearly others have decided to take advantage of the mini-rally and sell at prices not seen since the first days of March.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.