Next hammered by sales warning

Next has been riding high in recent months, climbing 14% since the turn of the year to an all-time peak of 7,625p. But caution about the year ahead had many investors banking profits on Thursday, as the high street fashion giant warned that some of its collections were unlikely to excite high-street shoppers as much as they did last, which will probably hit sales.

"Although the consumer economy looks benign, we remain very cautious in our sales budgets," said the firm. "Whilst we are happy with most of our current product ranges, we recognise that some collections are not as strong as they were at this point last year. There is a potential upside in the second half as the comparative performance last year weakens, particularly in the third quarter."

Warm weather was great for summer sales in 2014, and the fact that some of its collections are weaker than last year is worrying. Management has cut guidance by 2% and expects full price sales growth of 1.5-5.5% - 0-3% in the first half and 3.5-7.5% in the final six months. Pre-tax profit is expected to come in between £785 million and £835 million.

Full-year results for 2014 were mostly as expected, however, with a sixth consecutive year of double-digit earnings per share and dividend growth. That's despite warmer weather at the tail end of last year slowing sales of winter woollies, which meant a disappointing second half. Up 7%, revenue of £3.9 billion generated pre-tax profit before one-off gains of £782.2 million, 12.5% higher, giving underlying EPS of 419.8p.

Profit growth was seen in new estates, existing stores and online sales, but received a £9 million boost from currency trades which is not expected next year. Next ended the year with £272.7 million of cash and cash equivalents and broker Investec Securities believes this strong cash generation will support the share price.

Its store expansion and investment in its systems, delivery scope and labels, as well as increasing its lowest wages, inflated costs by £41 million, although these were offset by £42 million of savings. Cost of sales rose to £2.7 billion.

"With the shares now trading back below both the 20-day moving average and recent 7,280p breakout/support there is potential for the door to be opened for a retrace of the 6,400-7,290p gains from mid-December to early March," says Mike van Dulkan, head of research at Accendo Markets.

The update split analysts, with Investec's Alistair Davies describing its price/earnings (P/E) premium as "modest" and expecting strong cash generation will provide shareholders with double-digit returns with a prospective 5% dividend yield. Next's share price fell 4% to 7,328p, for a forward P/E ratio of 17 times.

But Espirito Santo's Tony Shiret is a seller.

Overall Next is highly rated and this is the second disappointment in last six months. We continue to point to structural slowdown in the main growth engine - high margin UK Directory business. Short-term downside will be limited to the revised buy-back target of 6,827p.

Warnings of any kind are unwelcome, and Next shares fell as much as 7% Thursday. It is clearly relying on a strong second half to offset a weak first six months, but it remains vulnerable to the unpredictable British weather. However, there were plenty of buyers at the day low share price and investors appear keen to buy on the dips.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.