Next rallies after guidance hike

A month ago we asked whether Next shares were worth £100. With the price up fourfold since 2011, clearly there was a temptation to take profits. But there was buying on the dips following a sales warning in March, and those investors have been rewarded. First-half sales actually beat guidance and the high street fashion chain now thinks it may make more than expected this year.

Sales jumped by 3.5% in the six months to 25 July, with just under half that from new floor space. In March, Next had predicted 0-3%, and reckons the warmer weather was behind an end of season rush. Next Retail sales rose by 0.8% and catalogue sale were up 7.5%

Now, management has revised up both sales and profit guidance for the year to January 2016. Sales are now tipped to grow by 3.5-6% versus 1.5-5.5% previously, while pre-tax profit should come in at £805-£845 million from £785-£835 million, representing growth of 2.9-8%.

"This increase is as a result of the better sales achieved in the first half of the year, we have not made any change to our second half sales forecast," Next pointed out. "The mid-point of our profit guidance is very close to the current market consensus."

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And because the share price has remained above Next's buyback price limit of £68.27, it has plenty of surplus cash to return to shareholders. It's why the firm will pay a 60p a share special dividend in November. The shares go ex-dividend on 8 October.

"Next's full-price trading stance means it was more than able to offset a weak May, and we believe this will once again result in a better gross margin out-turn relative to clothing peers," writes Alistair Davies at Investec Securities. "Improvements in trading within Directory should reassure in our view that Next can continue to deliver in existing and growth channels. Valuation reflects consistency of delivery, higher margin structure and ability to return surplus cash - a core holding."

Last month, Barclays estimated a three-year EPS compound annual growth rate (CAGR) of 8.5%, and said that if the directory business makes more than the Retail operation this year, the shares should trade at a premium to peers.

At 7,660p, Next trades on just under 18 times forward earnings, reward for consistency, higher margins and its ability to pay fat dividends. Even at these levels, though, the shares offer a prospective yield of over 5%.

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.