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By
Reuters
Published
Dec 9, 2011
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Can Next's rally continue in the face of austerity?

By
Reuters
Published
Dec 9, 2011

LONDON - UK fashion retailer Next has shrugged off the macroeconomic gloom shrouding European retailers in 2011, and risen about 30 percent in a year when Britain's FTSE 100 has fallen about 7 percent.

Next's strong performance comes despite slowing global growth and the threat of recession in Europe.

The UK retailer's gains have even outstripped those of the much sought after luxury goods firm Burberry, driven by its adroit management and successful Directory business, but can the shares continue their strong run in 2012?

BUY

Despite its strong share price performance, Investec Securities analyst Bethany Hocking, who recently upgraded Next to "buy", said the valuation is undemanding.

Next trades on a current price to earnings ratio of 12.2, compared to around 13.5 times for European retailers and 10 times for the FTSE 100, according to Thomson Reuters data.

"We consider Next a safe port in these stormy times," said Hocking. "Future upside should come from the continued roll-out of both standalone Home stores and overseas Directory."

Next has around 36 "Home" stores, tapping in to a growing trend among clothing firms to branch out into 'lifestyle' products, including furniture and home furnishings.

In November, Next said its online and catalogue business Directory, which trades online in 42 countries, saw sales jump 16.9 percent, helping the firm maintain full-year profit forecasts.

Analysts said the secret to Next's success in 2011 has been management's ability to manage pricing and control inventory in the current environment.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said: "The group's online international reach also continued to be extended -- Russia, China and Japan are now being targeted -- while strong cash generation supports an attractive shareholder returns policy."

SELL

Simon Irwin, analyst at Liberum Capital which has a "sell" rating on Next, however, argued that the potential impact of the Directory overseas was being overplayed, given it is so small in the context of the business as a whole.

"I do see risks to the business and I also think that they've benefited enormously in the last year from share buybacks," he said.

"I think it's (the valuation) certainly up with events. It's trading at a small premium to the sector, which is unusual."

Recent economic data in the UK and the euro zone has pointed to a heightened threat of recession in Europe.

"Next is the best run of the clothing retailers in the UK and probably Europe too ... However, in 2012 I would suggest even Next will not be immune to a slowdown," Darren Sinden, trader at Silverwind Securities, said.

Consumers are beginning to feel the pinch brought on by austerity measures in Europe, as shown in recent updates from Germany's Metro and the UK's Kesa and Tesco .

"Much of the confidence in the high street numbers rely on how quickly the market can counteract the threat of recession and if this materialises then Next will be hit the most given the strong run in the share price," Atif Latif, director of equities and derivatives at Guardian Stockbrokers, said.

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