Berenberg downgrades Next, expects challenging year for sector

(ShareCast News) - Berenberg downgraded Next to 'hold' from 'buy' and cut the price target to 7,300 from 7,600p.It reckoned 2016 will be a challenging year for UK retailers with increased competition bringing potential pressure on margins.It said while Next remains the multi-channel leader and the overseas business can provide longevity of top-line growth, it is more cautious about the potential threat of consumer demand for free home delivery.Next's best-in-class click-and-collect proposition has played a key role in the success of Directory, offering a convenient proposition at a low cost to the consumer, Berenberg added."It is, however, the only form of free delivery available to the customer and we see some risk that, as consumers become more demanding, Next will be forced to offer free delivery to home, eroding profitability."Berenberg also pointed to the disruption likely from the introduction of the national living wage from April 2016."We expect margin pressure as a result, and while management believes that some of the cost of the NLW can be passed to consumers, we believe that this will be difficult in the current operating environment."Nevertheless, Berenberg said Next's flexible store estate protects profitability and cash.It pointed out that management has "a relentless focus on cash generation and return", and the broker expects £1.7bn to be returned to shareholders in ordinary and special dividends over the next three years."With 56% of leases expiring within the next five years, we believe management is in a position to adapt the store estate if necessary."The bank lifted its earnings per share estimates for FY16/17/18 by 3.4%/2.2%/1.6% to reflect the change in share count from recent share buybacks.At 1446 GMT, Next shares were up 0.2% to 6,715p.