Next (NXT)


Next feels the heat as shares slump

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Next feels the heat as shares slump
Hopes that Next's (NXT) crucial Christmas period would reignite interest in the shares were dashed on Tuesday, as the clothing retailer blamed warm weather in November and December for another disappointing trading update. It's why the share price slumped by as much as 6% to a 12-month low.

Just 10 weeks after a tepid autumn report, Next, which held fire on discounting ahead of its End of Season Sale, reported NEXT Directory sales up a weaker-than-expected 2% in the 60 days to 24 December and Retail revenue down 0.5%. In all, full price sales rose 0.4%.

In the financial year-to-date, Retail sales are up 2.1% and Directory is 6.1% better, although that only gives total revenue growth of 3.7%, below previous guidance of 4-6%.

At least profit in the year to January will just about meet guidance of £810-£845 million, issued in October. That's down to "good control of margins, costs and stock, along with healthy clearance rates". A predicted £817 million of profit would be up 4.4% year-on-year, although it could be £7 million either way, depending on January trade.

Investors should tread carefully

Although Next's shares have already plunged as much as 16% in the last month, investors should still tread carefully. This is not just about the weather, admits Next top brass.

"Specifically, we believe that NEXT Directory's disappointing sales were compounded by poor stock availability from October onwards," they say. "In addition, the online competitive environment is getting tougher as industry-wide service propositions catch up with the NEXT Directory."

Haitong Securities retail analyst Tony Shiret isn't impressed: "We are genuinely surprised at how weak this [Directory] sales figure has been, even allowing for our view that this part of the business has been showing many signs of maturity resulting from the relative un-attractiveness of its consumer credit offer, which drove the business through the downturn."

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And Shiret thinks sticking with the share price limit of £69.62 for its share buyback programme flashes warning signals. The price is based on the lower end of Next's profit guidance for the year ahead, which the analyst believes implies a pre-tax profit forecast of £825-£830 million for 2016/17.

Consensus estimates are currently for £878 million, which puts Next shares on a price/earnings (PE) ratio, based on 2017 estimates, of 15.5 times.

"Clearly consensus has been moving down but this looks to us to represent a material reduction of expectation and a more cautious view, based principally on reduced expectation for the Directory business where we have long argued that maturity was approaching fast," says Shiret.

"Even we are surprised at how fast it has arrived at Next. Notwithstanding short-term support from the buy-back, we expect a material de-rating in due course as Next trades still at a 20-25% premium to the other large UK Non-Food retailers."

Surplus cash will pay dividends

Still, an anticipated £370 million of surplus cash will be used to pay shareholders more special dividends. The first will be 60p a share in February (the ex-dividend date is 14 January), which amounts to a quarter of the anticipated extra cash.

Include the special dividends, and Next offers a prospective yield of around 5.6%, which may be enough to keep loyal shareholders on board.

After forking out £341 million in special dividends last year and £214 million for the exceptional increase in Directory debt, net debt probably rose by 30% to £670 million in the year to January 2016.

With earnings per share growth just shy of 5%, an ordinary dividend yield of 2.2% and special dividend yield of 3.3%, total shareholder returns should reach 10.3%.

Next isn't being too specific with forecasts for the year to January 2017, pencilling in Next brand full price sales guidance of 1-6%. Profits should rise in tandem.

Full-year results should be released on 24 March.

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.