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Investing.com -- Goldman Sachs has upgraded UK fashion retailer Next (LON:NXT) to “buy” from “neutral,” raising its 12-month price target to 14,000p from 12,200p.
The brokerage cites consistent international growth, resilient UK performance, and improving supply-side dynamics as the basis for its revised outlook.
Despite a challenging macroeconomic environment, analysts at Goldman Sachs view Next as a stable growth retailer with relatively low share price volatility.
The company’s international business, still at an early stage of development, and its established online presence in the UK provide the basis for long-term expansion.
Next’s international online business continues to show strong momentum. The company has steadily increased its share in the £389bn global (ex-UK) online apparel and footwear market, from 0.06% in 2011 to 0.24% in 2024, according to Euromonitor.
Goldman Sachs expects this trajectory to continue, forecasting five basis points of market share gains annually through 2029.
This would bring Next’s share to 0.49% and implies a compound annual revenue growth rate of 21.6%.
The international business remains concentrated in Europe and the Middle East, which made up 59% and 30% of FY25 full-price international sales respectively.
Long-haul markets like the US, China, and India remain underpenetrated, largely due to strong local incumbents and lower investment levels to date.
However, the company is now leaning into third-party aggregator partnerships and expanding marketing efforts to increase traction in these regions.
In FY25, Next increased its international marketing spend by 85% to £44 million and plans a further 25% rise in FY26.
Based on its internal benchmarks, the company targets an incremental profit of £1.50 for every £1 spent on marketing.
Goldman Sachs estimates that, at this rate, the FY26 investment could generate an additional £82.5 million in profit.
Goldman also modeled alternative scenarios for international business. In a downside case with slower expansion, the five-year revenue CAGR would fall to 9.3%, while in an optimistic scenario, boosted by stronger performance in underpenetrated markets and aggregator partnerships, revenue growth could reach 27% CAGR.
While the broader UK consumer outlook remains cautious, recent high-frequency data suggests a rebound in retail activity.
According to BDO, fashion sales showed double-digit year-on-year growth in late March. Kantar data for the 12 weeks to March 2 indicates that Next outperformed the market, gaining 50bps of share to reach 9.8% and posting 5.6% sales growth compared to market growth of just 0.2%.
This performance supports Goldman Sachs’ view that Next’s hybrid retail and online model continues to deliver a competitive advantage domestically.
Next appears well-insulated from ongoing US-China tariff volatility due to minimal US revenue exposure.
On the cost side, around 42% of its tier-1 manufacturing partners are located in China. As US-facing retailers diversify production to mitigate tariffs, Goldman Sachs notes that Next may be able to negotiate better factory gate pricing as capacity opens up in Chinese facilities.
Additional input cost relief is expected from falling freight rates and softening raw material prices, particularly in cotton and polyester. Goldman’s internal cost of goods model reflects a material tailwind from these factors in FY26.
Goldman Sachs has raised its FY26, FY27, and FY28 earnings per share forecasts by 1.1%, 2.5%, and 3.7%, respectively, bringing FY26 EPS to 700.3p.
The new 12-month price target of 14,000p is based on a discounted cash flow model, incorporating revised earnings and a lower beta of 0.77, which reduces the firm’s WACC to 9.7%. The price target implies an 18.3x forward P/E on January 2027 earnings.
Goldman Sachs flags several downside risks, including slower international scaling through aggregators, weaker-than-expected performance from the Label segment, and softer returns on international marketing spend.
Domestically, risks include a decline in Next’s brand equity or a sharper-than-expected downturn in UK consumer spending.
Currency volatility, particularly a weaker sterling against the US dollar, could also impact gross margins due to Next’s USD-denominated sourcing contracts.