RBC Capital downgrades Next, Dixons Carphone

(Sharecast News) - RBC Capital Markets downgraded its stance on shares of Next and Dixons Carphone on Tuesday as it took a look at the European general retail sector, highlighting a preference for companies showing "structural growth".
The bank downgraded Next to 'sector perform' from 'outperform', saying it expects sentiment on the company to swing as it is perceived "either as a strong online and cash returns story, or as a mature, over-earning department store".

RBC said it was mindful of the shares' strong run and valuation moving above the historic average.

The bank, which lifted its price target on Next to 6,800p from 6,700p, said it now expects a solid sales outlook, particularly for the online business, driven by ongoing channel shift, Label and International.

In the near term, it sees potential for a small pre-tax profit beat due to stronger full-price sales this side of Christmas. "However we expect a moderate outlook in January due to Next's online growth areas being lower margin and a tough outlook for bigger ticket homewares," it said.

RBC also cut Dixons Carphone to 'sector perform' from 'outperform', keeping the price target at 135p as it said the valuation is less compelling after a recent run higher in the shares.

It remained positive on the stock, however, noting that Dixons has "a very strong" relative market position in electricals in the UK, Nordic and Greece, although the environment for big-ticket purchases remains challenging in the UK.

"Its smaller mobile business is still facing structural headwinds, but we see potential for DC to manage its cost base down and lower its working capital intensity over time.

"DC should also benefit from further cost savings in the UK (eg, lower rents) and from new online initiatives in the Nordic area."

More broadly, RBC highlighted four key areas where it sees "the biggest money making opportunities": online, discount, travel and athleisure. Of those, it said discount and travel retail sectors offer the most valuation upside.

"Valuations are at the low end of their historic ranges, reflecting investor concerns over the consumer outlook. We think this provides an opportunity to buy well positioned companies like B&M and WH Smith," it said.

At 1300 GMT, Next shares were up 0.1% at 6,556p and Dixons Carphone shares were down 3.1% at 122.40p.