The retailer’s strong online and credit offer leave it well-placed to benefit from heavily disrupted UK mid-market, by leveraging its logistics, range and customer loyalty advantages, said analysts at the bank.
Cash returns should be back on the cards from next year and valuation looks reasonable given its potential for strong online growth, RBC added.
The Canadian bank upgraded its investment stance to ‘outperform ‘from ‘sector perform’ with a price target of £88 from £81.
Results are due next week and the broker is expecting more news on its emerging “Total Platform” offer, with brands such as recently acquired Reiss and Victoria’s Secret in lingerie.
“Next has historically been a strong online and cash returns equity story, and we see the potential for Next to restart dividend payments from FY22 and also to make additional cash returns as the credit receivables are quasi-cash.”
In a bullish assessment, RBC added it is upping its FY22-23e profit forecasts which are 5-9% above consensus.
RBC says that Next has among the most defensive and balanced exposure in the sector, given its high weighting to online related activities, which generated c.56% of sales and c.63% of profit prior to the pandemic.
Next also has higher than average exposure to UK retail parks, and to homewares sales, which make up c.20% of the total.
“Having deleveraged its credit offer in 2019 due to the pandemic, we see an opportunity for it to convert recently acquired cash customers to credit this year and to take further share due a more price-competitive offer.”
The steep decline of the department store and branded apparel sector offers scope for market share expansion underpinned by a fast and highly automated logistics and strong omnichannel capability, a range advantage and a very large customer database, partly due to its roots as a catalogue based business.
“We see potential for Next to offer a durable mid single-digit top and bottom-line growth rate, and in addition indicates a c.5%+ cash yield, giving a double-digit total annual return for shareholders.”