The Fall continues

Deutsche Bank Markets Research Europe United Kingdom Retail Retail - Non Food Industry UK Clothing Retail Date 24 October 2016 Industry Update The Fall continues UK clothing market fell 2.6% in 12 weeks to 25th September ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Jaina Mistry Research Analyst (+44) 20 754-71337 jaina.mistry@db.com Charlie Muir-Sands, CFA Research Analyst (+44) 20 754-75749 charlie.muir-sands@db.com Warwick Okines Research Analyst (+44) 20 754-58546 warwick.okines@db.com Top picks NEXT (NXT.L),GBP4,810.00 Buy A B Foods (ABF.L),GBP2,522.00 Buy Source: Deutsche Bank Companies Featured Debenhams (DEB.L),GBP54.55 Hold 2015A 2016E 2017E DB EPS (GBP) 7.61 7.45 7.06 P/E (x) 10.3 7.3 7.7 EV/EBITA (x) 9.3 7.2 7.6 Marks & Spencer Group (MKS.L),GBP334.40 Hold 2016A 2017E 2018E DB EPS (GBP) 34.63 28.02 28.78 P/E (x) 14.4 11.9 11.6 EV/EBITA (x) 13.1 11.1 10.5 NEXT (NXT.L),GBP4,810.00 Buy 2016A 2017E 2018E DB EPS (GBP) 435.22 436.80 446.60 P/E (x) 17.2 11.0 10.8 EV/EBITA (x) 14.0 9.3 9.5 A B Foods (ABF.L),GBP2,522.00 Buy 2015A 2016E 2017E DB EPS (GBP) 102.81 104.69 117.04 P/E (x) 29.0 24.1 21.5 EV/EBITA (x) 25.1 18.2 15.7 Source: Deutsche Bank The Kantar release today showed no improvement in the market from the prior rolling 12 week period, 4 weeks ago. M&S saw its smallest share loss since March 2015 whilst market shares were statistically unchanged year-on-year for Next and Debenhams. Primark (ABF) continued to gain share. The period covers largely unreported data: it is wholly unreported for Debenhams and M&S, covers 8 weeks for Next and 1 for Primark. In this month’s report we also look at the performance of the clothing market of various European markets and the USA. M&S: easing share losses, improved sales mix but disappointing sales growth The results for M&S are a mixed bag. On a positive note, M&S’s share decline of 23bps was the smallest since March 2015, albeit it benefited from the timing effect of the shift in the summer sale from June (not included in the 12 week period) to July. Additionally, M&S continues to improve its full price sales mix, with discounted sales falling at its fastest rate since on our record. Despite this, we note that Kantar’s implied sales decline of 5% is below our Q2 LFL estimate of -3% for M&S’ Clothing & Home division. Market share trends for Debenhams and Next are unchanged The market decline of 2.6% was the same as the prior period and a positive surprise given the hot weather in the UK in September. The period is wholly unreported for Debenhams, which will report its FY results on Thursday. Debenhams’ market share was statistically unchanged, but is slightly weaker than last month (-6bps vs +2bps) with implied sales of -3.9%. Next is also holding share overall (-1bp vs +6bps prior). It continues to gain share across womens, mens and childrenswear but is losing share in the footwear and accessories market. The implied sales decline of 2.7% is better than the 5.1% fall that we estimate for Q3 to the end of October. In terms of its sales mix, Kantar reports that Next’s full price growth has deteriorated to its weakest level in the year to date. We also highlight that Primark continues to gain market share (+20bps), especially in childrenswear (+124bps). Clothing market trends vary by country Inside we look at the performance of the clothing markets in Germany, France, Spain and the USA. The weakness in the UK market is echoed in Germany and France and these markets in particular deteriorated in Q3 16 vs Q2. However the USA has seen a recovery and the Spanish clothing market continues to see steady growth. The UK market was the weakest major market in Q2. In Q3 it was still weaker than Spain and the USA but stronger than France and Germany. Our Buy-rated clothing retailers are AB Foods and Next Next trades on 10.8x, M&S on 11.7x, ABF on 21x and Debenhams on 7.7x calendar 2017 PE vs. the UK sector (ex ASOS and ABF) on 12.7x. Our target prices are generally DCF-based using WACC of 8.3-8.6% and nominal TGR’s of 1-1.5%, though for A B Foods we use sum-of-the-parts (see page 11 for more). Upside risks include: improved consumer spending overall or a recovery in allocation to clothing, market shar