Professional Documents
Culture Documents
Europe/United Kingdom
Equity Research
Apparel
Figure 1: Stability in Spring/Summer prices but mid-market price ranges remain very narrow
120
100
80
60
40
20
0
Apr-14 Sep-14 Nov-14 Mar-15 Jun-15 Sep-15 Nov-15 Mar-16 Jun-16 Sep-16 Nov-16 Mar-17 June-17
H&M Zara New Look
Mango Gap Next
River Island Primark M&S
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
15 June 2017
Figure 2: UK Cheap Basket (£ per Avg Item) – most prices continue to decline Y/Y despite the weakness of
sterling
35
30
25
20
15
10
0
Apr-14 Sep-14 Nov-14 Mar-15 Jun-15 Sep-15 Nov-15 Mar-16 Jun-16 Sep-16 Nov-16 Mar-17 June-17
H&M Zara New Look
Mango Gap Next
River Island Primark M&S
Primark's (ABF OP PT 3,200p) remains comfortably the best value in this survey. Entry
level prices appear to have risen, however given the limited amount of product that is
listed online, this may not be significant. Moreover many of the changes to our pricing
baskets are influenced by Accessories (Bags, Necklaces, Shoes) rather than core apparel.
Entry level peers such as New Look and Matalan have been trading poorly, but it may be
that the entry of Pep &Co (which opened 50 UK stores in 2016) has also added to
competitive pressure in the UK. Despite this Primark continues to trade well ahead of most
UK store-based peers with 1H (end Feb) LFL +2%, and we assume better trends since
then, given softer comps. Associated British Foods - The re-rating and de-rating of Primark
Figure 3: Range architecture has narrowed substantially over the past 2 years
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70
60
50
40
30
20
10
0
Apr-14 Sep-14 Nov-14 Mar-15 Jun-15 Sep-15 Nov-15 Mar-16 Jun-16 Sep-16 Nov-16 Mar-17 June-17
H&M Zara New Look Warehouse Mango
Ongoing pressure on input costs, although more mitigation than expected. Many
retailers have commented on obtaining better sourcing cost mitigation over the past six
months than expected. Now that commodity prices have annualized and transport costs
are increasing, there had been an expectation that a second successive year of material
cost mitigation would be hard to achieve, however such is the weakness of apparel
demand globally, that factory owners are clearly prepared to accept even lower margins to
keep their facilities open. This is not fully offsetting the impact of adverse FX rates as
hedges roll off, but is helping. On the other hand it is clear from our pricing work that there
are still no signs that apparel prices in Europe are rising to try to recover some of last
year's lost margin.
Figure 4: The impact from lagged exchange rates has eased in Europe but is
peaking in UK
Effective FX (£/US$) % chg Effective FX (US$/EUR) % chg
SS 14 1.536 -2.7% 1.307 2.6%
AW 14 1.631 3.0% 1.360 3.8%
SS 15 1.678 9.2% 1.356 3.8%
AW 15 1.558 -4.5% 1.200 -11.8%
SS 16 1.530 -8.8% 1.109 -18.2%
AW 16 1.488 -4.5% 1.099 -8.4%
SS 17 1.386 -9.4% 1.128 1.7%
AW 17 1.282 -13.9% 1.078 -1.8%
SS 18 1.269 -8.5% 1.111 -1.5%
AW 18 1.289 0.6% 1.128 4.5%
Source: Thompson Reuters, Credit Suisse estimates
Figure 5: Premium prices: June stable vs March but still negative mid/high teens Y/Y ex UK
Average quoted price of basket Spain (€) UK (£) France (€) Russia (₽) Japan (¥) USA ($) China (CN¥) Mexico (MXN)
Jun-15 74.68 86.94 90.80
Sep-15 80.19 81.88 96.96
Nov-15 78.01 79.16 94.52 7,988 17,248 153.74 929
Mar-16 62.23 62.27 76.74 6,993 13,569 119.83 701
Jun-16 56.34 56.38 67.34 6,699 11,296 108.07 599 1,299
Sep-16 56.17 63.16 62.62 6,699 10,240 107.29 605 1,332
Nov-16 57.28 65.16 66.45 6,999 10,824 111.13 640 1,421
Mar-17 48.95 55.66 55.62 5,363 8,823 88.82 511 1,210
Jun-17 49.51 56.21 58.39 5,443 9,157 92.71 539 1,249
% chg Y/Y -12.1% -0.3% -13.3% -18.7% -18.9% -14.2% -10.0% -3.8%
Quoted price is inc VAT inc VAT inc VAT inc VAT inc VAT ex taxes inc VAT inc VAT
VAT 21% 20% 20% 18% 8% 17% 16%
Average price ex-VAT Spain (€) UK (£) France (€) Russia (₽) Japan (¥) USA ($) China (CN¥)
Jun-15 61.72 72.45 75.66
Sep-15 66.27 68.23 80.80
Nov-15 64.47 65.97 78.77 6,769 15,970 153.74 794
Mar-16 51.43 51.89 63.95 5,927 12,564 119.83 599
Jun-16 46.56 46.98 56.12 5,677 10,459 108.07 512 1,120
Sep-16 46.42 52.63 52.18 5,677 9,481 107.29 517 1,149
Nov-16 47.34 54.30 55.38 5,931 10,023 111.13 547 1,225
Mar-17 40.45 46.38 46.35 4,545 8,170 88.82 437 1,043
Jun-17 40.91 46.84 48.66 4,613 8,478 92.71 461 1,077
Premium vs. Spain (spot FX) Spain UK France Russia Japan USA China Mexico
Jun-15 100 163 123
Sep-15 100 141 122
Nov-15 100 145 122 150 188 222 180
Mar-16 100 129 124 148 195 210 161
Jun-16 100 129 121 165 185 206 148 115
Sep-16 100 133 112 168 177 206 148 115
Nov-16 100 134 117 183 181 222 159 103
Mar-17 100 136 115 182 170 208 149 104
Jun-17 100 130 119 177 167 203 148 129
Source: Company data, Credit Suisse estimates
Following further price reductions at the start of S/S 17, pricing later in the season is now
stable, but still lower mid-high teens in most markets, apart from the UK. Inditex
management is clearly determined to maintain the pressure on peers.
At lower prices points they are broadly flat, so the range of price architecture continues to
narrow as has been the case for the past two years.
Regional prices differences have all been maintained, with Europe ex Spain nearly flat at
entry level but +15% vs Spain at upper levels. UK pricing is c30% higher than Spain,
China 50% higher and the US almost double. This means that there are some material
differences in gross margins by geography.
Figure 6: Entry level prices are more stable and regional price differences are lower
Average quoted price of basket Spain (€) UK (£) France (€) Russia (₽) Japan (¥) USA ($) China (CN¥) Mexico (MXN)
Jun-15 16.13 16.27 17.90
Sep-15 15.39 15.43 18.51
Nov-15 17.41 14.16 17.41 1,393 2,757 21.81 146
Mar-16 16.17 14.99 16.17 1,843 3,090 23.90 158
Jun-16 14.60 14.60 14.78 1,693 2,790 25.34 153 332
Sep-16 15.55 15.55 15.51 1,710 2,879 23.36 160 343
Nov-16 14.43 14.43 15.62 1,555 2,657 22.60 150 325
Mar-17 15.60 15.60 15.91 1,666 3,046 23.71 156 398
Jun-17 14.38 14.38 14.78 1,599 2,879 23.08 148 367
% chg Y/Y -1.5% -1.5% 0.0% -5.6% 3.2% -8.9% -3.3%
Quoted price is inc VAT inc VAT inc VAT inc VAT inc VAT ex taxes inc VAT inc VAT
VAT 21% 20% 20% 18% 8% 17% 16%
Average price ex-VAT Spain (€) UK (£) France (€) Russia (₽) Japan (¥) USA ($) China (CN¥)
Jun-15 13.33 13.56 14.92
Sep-15 12.72 12.86 15.42
Nov-15 14.38 11.80 14.50 1,181 2,552 21.81 125
Mar-16 13.37 12.49 13.48 1,562 2,861 23.90 135
Jun-16 12.07 12.17 12.31 1,435 2,583 25.34 131 286
Sep-16 12.85 12.95 12.93 1,449 2,666 23.36 137 296
Nov-16 11.93 12.03 13.02 1,317 2,460 22.60 128 280
Mar-17 12.89 13.00 13.26 1,412 2,820 23.71 134 343
Jun-17 11.88 11.98 12.32 1,355 2,666 23.08 127 317
Premium vs. Spain (spot FX) Spain UK France Russia Japan USA China Mexico
Jun-15 100 141 112
Sep-15 100 138 121
Nov-15 100 116 101 117 135 141 127
Mar-16 100 120 101 150 171 161 140
Jun-16 100 129 102 161 176 186 147 114
Sep-16 100 118 101 155 180 162 142 107
Nov-16 100 117 109 161 176 179 148 93
Mar-17 100 119 103 177 184 174 143 108
Jun-17 100 115 104 179 181 174 140 131
Source: Company data, Credit Suisse estimates
Entry level pricing is notably lower Y/Y in most markets, even the UK, which may reflect
H&M's need to start making inroads into the inventory mountain (1Q SKr32.7bn +30%
Y/Y).
Europe/United Kingdom
Apparel
Next (NXT.L)
Rating (from NEUTRAL) UNDERPERFORM
Price (13 Jun 17, p) 4226.20
Target price (p) (from 4250.00) 4000.00
Market Cap (£ m)
Enterprise value (£ m)
6,214.9
7,102.4
Wrong strategy in a poor market as self-help
Target price is for 12 months.
fades
Research Analysts
■ Mature apparel retailers have to face up to ongoing market share loss
Simon Irwin
44 20 7888 0320
as apparel markets fragment and demand migrates online. In addition we
simon.irwin@credit-suisse.com see little sign of apparel demand recovering, especially in the UK, given
Pradeep Pratti, CFA deflation, weak collections and negative real wage growth. In this
44 207 888 5043 environment, Next's strategy of continuing to add space and increase prices
pradeep.pratti@credit-suisse.com
feels wrong, and while self-help to apparel collections may improve through
the year, the environment for homeware is likely to deteriorate. It's therefore
not certain that the rest of the year will improve on 1Q when sales were -3%
(Retail -8.1%, Directory +3.3%) despite soft comps and better weather.
■ 2016/17 PBT fell £31m, despite profit from Credit, Label and
International increasing £49m, giving a sense of the declines in the core
Next UK Brand (-12%, margin -180bp): However all of the non-core
increases were one-off to some degree, and we see the combined
contribution from the three being £11m this year and negative next, as credit
income rolls over. While credit account numbers stabilized in 2H, the quality
of new additions is low, and overall account growth in 2H (+30/-) and FY
(+180/-) is at multi-year lows. Core Directory margins (ex Credit, Label, Intnl)
have been falling in a near straight line for 6 years, and we see little change
in the proposition which will alter that.
■ Following the weak 1Q we are cutting 4% from forecasts. Where our
forecasts principally differ from consensus is in the multi-year structural
nature of the decline in profitability and cash conversion. Consequently while
the 7.8% dividend yield provides some support, we forecast special dividends
falling by at least 10% pa, as balance sheet leverage increases. We are
cutting our 12m FWD target price by 6% to 4,000p (vs 4,250p) and are
downgrading our rating to Underperform (vs Neutral).
Share price performance Financial and valuation metrics
8 ,5 0 0 Year 1/17A 1/18E 1/19E 1/20E
7 ,5 0 0 Revenue (£ m) 4,136.8 4,099.2 4,074.9 4,059.7
6 ,5 0 0 EBITDA (£ m) 935.2 849.4 791.2 748.9
5 ,5 0 0 Pre-tax profit adjusted (£ m) 790.20 708.88 651.33 608.49
4 ,5 0 0 CS EPS (adj.) (p) 438.14 389.73 359.91 342.52
3 ,5 0 0 Prev. EPS (p) - 406.50 376.70 -
Ju l - 1 5 Jan - 1 6 Ju l - 1 6 Jan - 1 7 P/E (adj.) (x) 9.6 10.8 11.7 12.3
P/E rel. (%) 52.7 70.9 82.5 93.9
N XT .L FT SE A LL SH A RE IN D EX
EV/EBITDA (x) 7.6 8.4 8.9 9.4
The price relative chart measures performance against the Dividend (01/18E, £) 158.00 Net debt/equity (01/18E,%) 159.7
FTSE ALL SHARE INDEX which closed at 4103.1 on Dividend yield (01/18E,%) 3.7 Net debt (01/18E, £ m) 887.5
13/06/17 BV/share (01/18E, £) 3.9 IC (01/18E, £ m) 1,443.3
On 13/06/17 the spot exchange rate was £.88/Eu 1.-
Free float (%) 100.0 EV/IC (01/18E, (x) 4.9
Eu.89/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
Performance 1M 3M 12M
Absolute (%) -0.5 12.2 -16.5
Relative (%) 0.8 11.6 -40.2
Next (NXT.L)
Price (13 Jun 2017): 4226.20p; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from 4250.00p) 4000.00p; Analyst:
Simon Irwin
Income statement (£ m) 1/17A 1/18E 1/19E 1/20E Company Background
Revenue 4,137 4,099 4,075 4,060 Next plc is a United Kingdom-based retailer offering products in
EBITDA 935 849 791 749 clothing, footwear, accessories and home products. Next distributes
Depr. & amort. (108) (104) (102) (99) through three main channels: Next Retail; Next Directory; and
EBIT 828 745 689 649 Website.
Net interest exp. (38) (36) (38) (41)
Associates - - - - Blue/Grey Sky Scenario
PBT 790 709 651 608
Income taxes (155) (135) (124) (110)
Profit after tax 635 574 528 499
Minorities - - - -
Preferred dividends - - - -
Associates & other 0 0 0 0
Net profit 635 574 528 499
Other NPAT adjustments 0 0 0 0
Reported net income 635 574 528 499
Cash flow (£ m) 1/17A 1/18E 1/19E 1/20E
EBIT 828 745 689 649
Net interest (31) (36) (38) (41)
Cash taxes paid (151) (155) (135) (124)
Change in working capital (88) 39 49 49
Other cash and non-cash items 111 98 94 91
Cash flow from operations 668 690 660 625
CAPEX (157) (130) (130) (130)
Free cashflow to the firm 511 560 530 495
Acquisitions - - - -
Divestments 3 0 0 0
Other investment/(outflows) 0 0 0 0
Cash flow from investments (154) (130) (130) (130)
Net share issue/(repurchase) (188) (30) (33) (36)
Dividends paid (314) (496) (449) (415)
Issuance (retirement) of debt - - - - Our Blue Sky Scenario (p) (from 5300.00)
Cashflow from financing (522) (547) (503) (472) 5000.00
Changes in net cash/debt (8) 12 25 23 The Blue Sky scenario has near-term earnings 5% higher than
existing forecasts and terminal margins 200bp higher. We increase
Net debt at start 891 899 887 862 the 12m FWD PER from 11x to 13x (1sd above the M-T mean) and
Change in net debt 8 (12) (25) (23) decrease the FCF Yield from 8% to 6%. This gives a 12m FWD
Net debt at end 899 887 862 839 valuation of 5,000p.
Balance sheet (£ m) 1/17A 1/18E 1/19E 1/20E
Assets Our Grey Sky Scenario (p) (from 3450.00)
Total current assets 1,661 1,676 1,651 1,623 3250.00
Total assets 2,405 2,446 2,449 2,451 The Grey Sky scenario has near-term earnings 5% lower than
Liabilities existing forecasts and terminal margins 200bp lower. We reduce the
Total current liabilities 1,639 1,648 1,640 1,634 12m FWD PER from 11x to 9x (1sd below the M-T mean) and
Total liabilities 1,894 1,890 1,877 1,864 increase the FCF yield from 8% to 10%. This gives a 12m FWD
Total equity and liabilities 2,405 2,446 2,449 2,451 valuation of 3,250p.
Per share 1/17A 1/18E 1/19E 1/20E
No. of shares (wtd avg.) (mn) 145 147 147 146 Share price performance
CS EPS (adj.) (p) 438.14 389.73 359.91 342.52
Dividend (p) 158.00 158.00 158.00 158.00 8,500
Free cash flow per share (p) 352.48 380.19 361.58 340.14
7,500
Key ratios and valuation 1/17A 1/18E 1/19E 1/20E
Growth/Margin (%) 6,500
Sales growth (%) (0.3) (0.9) (0.6) (0.4)
5,500
EBIT growth (%) (2.8) (10.0) (7.5) (5.8)
Net income growth (%) (3.0) (9.6) (8.1) (5.4) 4,500
EPS growth (%) 0.6 (11.0) (7.6) (4.8) 3,500
EBITDA margin (%) 22.6 20.7 19.4 18.4
Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 May- 17
EBIT margin (%) 20.0 18.2 16.9 16.0
Pretax profit margin (%) 19.1 17.3 16.0 15.0
NXT.L FTSE ALL SHARE INDEX
Net income margin (%) 15.4 14.0 12.9 12.3
Valuation 1/17A 1/18E 1/19E 1/20E
EV/Sales (x) 1.7 1.7 1.7 1.7 The price relative chart measures performance against the FTSE ALL SHARE
EV/EBITDA (x) 7.6 8.4 8.9 9.4 INDEX which closed at 4103.1 on 13/06/17
EV/EBIT (x) 8.6 9.5 10.3 10.9 On 13/06/17 the spot exchange rate was £.88/Eu 1.- Eu.89/US$1
Dividend yield (%) 3.74 3.74 3.74 3.74
P/E (x) 9.6 10.8 11.7 12.3
Credit ratios (%) 1/17A 1/18E 1/19E 1/20E
Net debt/equity (%) 176.1 159.7 150.8 142.8
Net debt to EBITDA (x) 1.0 1.0 1.1 1.1
Interest coverage ratio (x) 22.1 20.7 18.1 15.8
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
Key Charts
Figure 10: Price momentum has recovered Figure 11: EPS momentum remains very weak
30% 12% 560 8,500
Overbought
510 7,500
20% 10%
460 6,500
EPS (p)
360
0% 6% 4,500
310
-10% 4%
3,500
260
210 2,500
-20% Oversold 2%
160 1,500
-30% 0% 110 500
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Next % dev from 6m ave, lhs Average (+/-1SD) Next rel to UK mkt FY14 FY15 FY16 FY17
FY18E FY19E Share price
Figure 12: 12M Fwd PE is broadly in line with its Figure 13: Fwd PE relative to FTSE100 looks cheap
history as do most UK retailers
19 1.4
1.3
17
1.2
15
1.1
13
1.0
11
0.9
9 0.8
7 0.7
5 0.6
Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17
0.5
NXT Fwd PE average +1 SD -1 SD Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17
Figure 14: Special dividends will fall along with cash Figure 15: Rising gross margins have supported
conversion weak sales metrics until now
Year to Jan 2016A 2017A 2018E 2019E 2020E
58% 22%
Net debt 852 865 805 778 755
Cash conversion 57% 77% 94% 96% 95% 57%
20%
Cash conversion (ex credit) 91% 84% 89% 85% 83%
Lease adj debt/EBITDAR 2.2 2.3 2.5 2.7 2.9 56%
Buybacks -151 -188 -30 -33 -36 18%
55%
Diluted EPS 435 438 390 360 343
% chg 6.3% 0.6% -11.0% -7.7% -4.8% 54% 16%
Fully diluted EPS 417 438 387 357 340
Ordinary DPS/share 158 158 158 158 158 53%
14%
Cover 2.8 2.8 2.5 2.3 2.2 52%
Interim 53 53 53 53 53
12%
Final 105 105 105 105 105 51%
Special DPS/share 230 60 180 150 128
50% 10%
Total payout ratio 93% 50% 87% 86% 84%
2007 2009 2011 2013 2015 2017 2019E 2021E
Next Brand GM (LHS) Next Brand EBIT margin
Margin ex Credit/Label/Intnl
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Directory FP sales 4.2 5.7 4.9 0.0 5.1 4.2 3.3 3.0 3.2 3.0 3.0 3.0
2Y Directory 13.4 10.7 6.2 7.1 7.5 8.7 3.0 8.1
3Y Directory 27.1 29.5 15.9 14.6 16.7 13.7 9.2 10.1
Brand ex space -2.5 -1.2 -1.8 -5.1 -2.0 -4.6 -1.2 -2.7 -1.8 -1.4
2Y -0.7 -0.8 -1.2 -3.5 -7.1 -2.4 -6.9 -3.4
Space Contbn to Retail 2.7% 2.5% 2.6% 2.5% 2.5% 2.7% 2.5% 2.6% 2.2% 2.0% 2.2
Source: Company data, Credit Suisse estimates
The company is pinning most of the blame on gaps in its product ranges arising from the
implementation of its short game strategy, implying that products have become too edgy
for its core family-oriented customers. The initiative was aimed at speeding up time to
market, not turning Next into a fast fashion retailer, and they do believe they can
progressively rectify this through the rest of the year, however that remains to be proved.
In addition homeware has become softer and more promotional as housing transaction
numbers have declined Y/Y.
Next was not blaming their decision to increase prices, in a market that remains
deflationary and competitive. Nevertheless we do not believe that the entry price
reductions identified in our survey are entirely coincidental. In categories such as Skirts,
Dresses, Trousers, Jeans and shoes this has brought prices down to levels which we have
rarely seen from Next in the past 3 years.
Since 1Q most UK retail metrics have continued to deteriorate, as the squeeze on family
budgets is playing out a bit faster than expected, and we would be concerned about the
impact of slowing residential transactions on Next's homeware sales.
Over-reliance on Directory:
Next Retail operating profits fell from £402m (16.9% sales) to £339m (14.7%) in 2016/17.
Given current trends in Retail, this decline seems likely to continue at a similar level in the
current year. However the Group PBT decline of just £31m resulted from another strong
performance in Directory where EBIT increased from £405m (24.4% of sales) to £444m
(25.7%).
The principal drivers of this were Credit (+£22m), Label (+£12m) and International
(+£15m) and similar future growth rates look very look unlikely.
Given the prominence of UK unsecured consumer lending, we would also focus on
Directory's credit customer numbers. While the company made a big deal over the relative
stability of its Credit A/C metrics in 2H, we have some reservations:
The first is that overall active customer growth in 2H (+30/-) and FY (+180/-) are at
multi-year lows. The slowdown was at all levels including International (FY +90/-), UK
cash (FY +170/-) and UK credit (FY -80/-).
The second is that we assume the quality of new credit accounts is low as Next has
ramped up the marketing, so new joiners are offered 0% interest free for 3 months and
£10 off the first order (on orders >£15). It is reasonable to assume that the churn on these
new accounts will be quite high once the initial benefits have been taken, and the yield on
the credit book will decline as interest free is used more tactically in this and other
initiatives (ie furniture).
The average credit balance per account was £390 vs £262 two years earlier and we
already believe that this had a detrimental impact on Directory sales last year. Without this
increasing even more, or bad debt levels declining even more, we believe this will
inevitably decline on lower yields (more interest free) or lower account numbers as lower
quality adds churn faster.
Label grew sales by 14.4% (vs 24%) but margins recovered to 16% (vs 12%) on lower
markdown. Guidance for the year ahead is for sales growth of 17% but maintained
margins which would give a Y/Y contribution of £5m (vs £12m), and given the branded
product it is hard to see how margins could be higher in the medium term.
International saw sales +19% in constant currency and margins of 22% (vs 16%). It is
clearly benefitting from the weakness of sterling on translation and prices will not be
increased (unlike the UK), so Next is guiding to reported sales growth of 24% and margins
+200bp to 22% giving a £17m increase in profits (vs £15m). Our only concern with this is
the low level of customer recruitment (+90/- in 2016/17 vs +265/- and 227/- in the prior two
years). Given the high cost of recruitment, this lower level would have been quite
favourable to margins in 16/17 and it comes as sales per customer continue to fall.
So while the three businesses grew EBIT by £49m in 2016/17, we see that declining
to £11m in the year ahead and may decline the following year, unless the very high
margins in Intnl are sustainable as FX annualises.
Meanwhile core Directory margins (ex Credit, International and Label) have been declining
in a near straight line for the past 6 years, and we see little reason for this to change
unless they can get the Directory proposition back ahead of the market or the Next
product/brand appeal improves materially, in what we expect to remain a difficult
environment. We therefore maintain our view that Directory profits have peaked and will
decline in subsequent years.
Consequently while the 4.1% cut to current year forecasts is not significantly different from
consensus, or the mid-range of company guidance (PBT £710m) what we believe
distinguishes our forecasts from consensus is the structural nature of the decline over the
next three years or more:
Profit based measures tend not to be useful for valuing shrinking businesses, and we
believe that Next is likely to be supported more on cash generation and dividends, and the
shares now trade on c9% FCF yield and 7.8% dividend yield.
On our forecasts cash conversion will improve marginally in 17/18 as a result of the lower
capex (£130m vs £161m) however as margins and EPS decline, a maintained ordinary
payment leads to cover decreasing, and leverage going up. We assume that Next will
want to start reducing net debt to keep debt metrics under control, and thus the special
dividend payments will decline quite sharply in subsequent years.
We have only made marginal changes to our target price methodology, except to remove
the reducing credit balance from the FCF yield calculation, given that it is not sustainable.
It is also worth noting that in our DCF we still have a 15% EBIT margin into perpetuity,
which seems quite generous given Next's current performance and industry peers.
Disclosure Appendix
Analyst Certification
Simon Irwin and Pradeep Pratti, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Next (NXT.L)
NXT.L Closing Price Target Price Target Price Closing Price NXT.L
Date (p) (p) Rating 8,500
30-Jun-14 6035.06 6387.16 N
31-Dec-14 6405.94 6632.37 7,500
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
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Outperform/Buy* 44% (65% banking clients)
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Underperform/Sell* 14% (53% banking clients)
Restricted 2%
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European Apparel Pricing 16
15 June 2017
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This research report is authored by:
Credit Suisse International...................................................................................................................................Simon Irwin ; Pradeep Pratti, CFA
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Credit Suisse International...................................................................................................................................Simon Irwin ; Pradeep Pratti, CFA
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