Next now deserves 'best in class' valuation as international sales accelerate, says Citi

Next PLC's (LSE:NXT) latest upgrade has left analysts asking a familiar question: how much is the retailer holding back in its guidance?

Second-quarter full-price sales grew 9.2%, more than double management’s 4% assumption. International sales surged 36.9%, while UK growth of 2.8% also exceeded expectations.

The performance prompted Next to lift annual adjusted pre-tax profit guidance by £25 million to £1.24 billion.

Such a lift is well known to investors in the company, having marked the company’s 20th upgrade since the start of the 2024 financial year, according to Shore Capital.

Both Shore Capital and Citi believe Next is still being conservative about the second half.

Citi analyst Monique Pollard forecasts second-half full-price sales growth of 6.6%, against guidance of 5%. She estimate includes international growth of 20.2%, compared with Next’s 14% assumption.

Pollard raised her adjusted pre-tax profit forecast to £1.26 billion and lifted Citi's share price target to £155 from £132.

More significantly, she flagged that the earnings multiple has increased to 18 times from 15 times, arguing that Next "now commands a higher multiple", closer to Spanish retail heavyweight Inditex (BME:IDX), "the best-in-class global peer".

Shore Capital is a mite more bullish on profit, forecasting £1.27 billion, and retained its £175 target and ‘buy’ recommendation after results that showed "the breadth of the earnings drivers across the business".

Shore Cap analyst David Hughes said the international business was becoming the "most compelling growth engine" and should grow to more than 20% of group revenue. Higher marketing spending overseas is producing profitable returns, suggesting the recent growth is not solely the release of pent-up demand.

The main blemish is UK stores, where sales fell 0.3% despite inflation. But Shore Capital noted that stores retain an operating margin of around 12%, while short leases give Next flexibility to shrink its estate.

Next’s valuation is no longer cheap. Yet the two brokers’ forecasts suggest its habit of under-promising may still leave room for further upgrades.