Next PLC (LON:NXT) and JD Sports Fashion PLC (LON:JD.) are seen as two of the winners in a changing UK clothing retail market, with Credit Suisse predicting Next's Label platform will be a crucial tool as consumers increasingly favour multi-brand shops.
The Swiss bank upgraded Next to ‘neutral’ from ‘underperform’ and raised the target price to 6,000p from 5600p.
For the FTSE 100 group, analysts believe the key will be its Next Label distribution channel, one of a “small number of high quality multi-brand distributors” along with JD Sports, Asos PLC (LON:ASC) and Germany’s Zalando as the retail sector continues its next structural shift.
Trend towards multi-brand shops
Currently, 63% of the UK apparel market is given over to single-brand retail such as H&M, M&S, Uniqlo, Inditex’s various chains, and Next.
“However when demand is increasingly driven by online/social media engagement, rather than footfall, we see consumers increasingly favouring smaller brands and multi-brand distribution.”
As a result, Credit Suisse believes there is likely to be a further acceleration of the restructuring of apparel and footwear brands and distribution because most major players have not reduced store selling space despite falling sales densities, growing online penetration and company collapses.
“There is too much branded retail in UK apparel and insufficient multi-brand (27% of which 9.5% is sportswear), much of which is poor quality and underinvested,” analysts said.
While many brands are boosting direct to consumer channels, “even the largest” such as Nike/Adidas will be reliant on third parties for at least 60% of distribution, they added, making Next Label, JD, Asos and the like ever more important.
“Next Label as a platform has good potential as the industry consolidates and Next Retail is benefitting from downsizing and under performance of peers.”
Online penetration is seen as further accelerating as physical restructuring rumbles on as secondary and tertiary locations lose footfall.
Credit Suisse remains cautious on most high street retailers such as Inditex, H&M and M&S as market shares is predicted to “naturally fragment” but Next will temporarily benefit from “survival bias”.