Broker snap: Better margin outlook at Next

21st Apr 2011 10:28

With a better margin outlook at fashion and homeware retailer Next, UBS hikes up its earnings forecasts and target price, keeping its 'buy' recommendation.The broker expects Next to report a solid first quarter, forecasting Retail like-for-like growth -5%, space contribution of 3% and Directory up 7.5%. This gives a 1% increase for Next Brand, the midpoint of first half company guidance of -0.5% to 2.5%. The broker notes that comparatives ease by 400 basis points (bp) in the second half.Additionally, "Comments from M&S and Debenhams suggest the industry is acting rationally in raising prices and reducing volume orders. Inventory increases reflect timing issues and inflation. Although early days, markdowns may be less than we expect and we assume that gross margins decline by 25bp less than before, giving -75bp for Retail and -50bp for Directory,? said the broker.The broker ups its pre-tax profit forecasts for the 2011-12 year by 2% to £550m. As a result of reduced gross margin pressure, the target price it raised to 2,450p, from 2,250p. ---bc