Next clueless as shares crash

The storm clouds gathered over a host of high street retail stocks Wednesday following Next's warning that recent sales trends have been "extremely volatile".

With Next regarded as a bellwether for UK fashion, jittery investors needed no second invitation to ditch peers including Marks & Spencer (down 5%), Debenhams (down 3%) and Primark owner Associated British Foods (off 2%).

Next itself slumped by as much as 10% to under 4,420p, even though it has stuck by annual pre-tax profits guidance and said full-price sales in the third quarter were up 1.3%. But this performance was still weaker than most City expectations following a dismal October, when sales were impacted by a period of warmer weather.

Directory online and catalogue sales propped up the result, with growth of 13.2% for the three months. In contrast, sales in high street stores slumped by 7.7%.

Overall, Next said volatility week-to-week had made it very hard to determine any underlying sales trend. It reckons the most reliable guide to fourth-quarter performance is the 0.3% decline in full-price sales for the year so far.

The mood of uncertainty in the run-up to the fourth quarter and crucial Christmas trading season has put paid to the FTSE 100 stock's recent share price recovery. They're now back to levels not seen for seven weeks, since the day before September's interim results when the shares surged by 11%.

On that occasion, chief executive Lord Wolfson said Next's autumn ranges had gone down better with consumers than those in the spring. This helped the mid-point for the company's profit guidance to increase by £7 million to £717 million.

However, official retail sales figures have since shown an unexpectedly large fall of 0.8%, while margins are still being squeezed by higher cost of imports, caused by the weak pound.

In the City, UBS analyst Andrew Hughes is holding his nerve on Next, retaining the bank's 'buy' rating and price target of £50 a share.

He added: "We retain our pre-tax profit forecast of £725 million, although the biggest swing factor remains the weather."

One factor in Next's share price favour is its record of strong cash flow, which should lead to further shareholder pay-outs in the next few months.

It has announced a fourth special dividend of 45p per share and said it expects to return a second tranche of £25 million from surplus cash flow through share buybacks before the end of the financial year.

In September, we said Next's was "generating oodles of cash and, after profit upgrades, the shares are still not expensive and trade at a discount to the sector".

So, now that the post-interim rally has almost completely unwound, the shares trade on a modest 11 times earnings per share estimates for the year to January 2019, and yield 3.5%, excluding special dividends.

A Christmas trading update, on 3 January this financial year, typically cause fireworks. This time is unlikely to be any different.

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