Berenberg says Next failing to deliver, downgrades to 'sell'

Berenberg downgraded its recommendation on shares of Next following the recent rally in the fashion retailers's shares, telling clients there was now "material downside" following the company's weather-driven second quarter beat.

Analysts at the German broker also lowered their target price from 3,850p to 3,650p, arguing that its excess of store space robbed it of the flexibility needed to invest in what clients wanted most, namely product and free home delivery, leading to a loss of market share.

True, in the near-term offering home delivery might subtract five percentage points from its Directory operating margins on an EBIT basis, they conceded.

Yet in their opinion it was ultimately necessary, instead of focusing on short-term profitability and cash flow, if management wanted to defend its market share.

To back up their case, they pointed out how in the past 10 years store revenues had risen by 2% verus a 71% jump in space.

"We believe management's current strategy is formulated to maximise short-term returns, rather than adapting to ensure longer-term survival. This is
preventing Next from investing in areas that matter most to the consumer, in our view, leading to market share erosion."

Indeed, the lack of free-delivery, together with the absence of a differentiated product on account of the retailer's unresponsive supply chain, had led to a sharp reduction in consumers' perception of the value-for-money the company was offering, Berenberg said.

To take note of, roughly 92% of consumers now said they preferred home delivery.

The move towards digital had also eroded the competitive advantage from having a well-located storte estate.