After better-than-expected interims from Next (NXT), both Eithine O’Leary of Oriel and Matthew McEachran of Kaupthing Singer & Friedlander have upgraded the shares. O’Leary is now recommending clients to ‘buy’ the shares with a price target of £13. McEachran now has a target of £12 and a ‘hold’ recommendation.

Neither analyst expects the retail scene to improve, although both expect Next’s market share to rise. McEachran says the ‘Autumn ranges especially in womenswear have performed much better’. He believes the brand ‘is now starting to turn the corner’ and expects to ‘see improving market share data’.

The stores have also been improved, with ‘more contemporary designs and display techniques being used’. In addition, ‘visual merchandising standards have improved’. Oriel believes these improvements should lead to Next trading ‘better than the wider market over the next six to 12 months’.

The group adopted a more cautious approach to this year than many of its competitors. As a result gross margins should be up by 110 basis points due to improved markdown controls.

The group has indicated further share buybacks are ‘unlikely’ in the short term. Capital expenditure is now falling as 70% of the store portfolio has been modernised. Kaupthing believes this will lead to ‘stronger cash inflows’. McEachran expects 2009/10 to be the ‘trough year’ in earnings, but he still expects cash inflows of £180 million then to bring net debt down to £450 million - less than half its £995 million facility. Oriel is forecasting earnings of 162p placing the shares on a price/earnings ratio (PE) of 6.8.

the writer holds shares in this company