"Retailer Next got a boost on Thursday as RBC Capital Markets upped its stance on the stock to outperform from sector perform and hiked the price target to 5,500p from 4,800p.
The bank said its proprietary entry price point pricing survey suggests Next has become more price competitive, in particular versus the likes of competitors M&S and Debenhams.
In addition, RBC reckoned that recent strength in the pound against the dollar could lift Nexts gross margin earlier than peers.
Next typically hedges 9-12 months out in advance, shorter than M&S and Debenhams, who hedge 12-18 months out in advance; as such Next should realise its margin benefit a quarter earlier, said RBC, noting that Next sources around 70% of its cost of goods sold in US dollars.
All else being equal, we estimate Next could see a theoretical 130-300 basis points of gross margin tailwind from FX for FY19/20E. We believe some of this margin gain will be offset by higher cotton costs, mix dilution, as well as the need to invest in its product and online propositions, but we now believe Next can sustain its margins rather than seeing a decline.
R -- It's a point that also concerns me, however, it's amazing how many people are oblivious to the financial aspects of their purchasing methods.
Martin Lewis is very visible and doing his best to educate people - and the shows can be construed as mildly entertaining if watched "IN FULL", but there is a world of difference between people watching a program and actually doing something about it.
Without being derogatory I'm assuming that once everyone has finished laughing at the antics on the show, they make a cup of tea and then switch to Coronation Street or Emmerdale.
Still I'm also curious as to what constitutes a good price for Next -- I entered at £40.6 so am sitting on a 25% gain or thereabouts + a whole raft of dividends which takes that number far higher (can't be arxed to calculate it).
When do we say syonara, or is it that Next will maintain a respectable credit card margin business, manage the costs of a declining stores business at each lease renewal and continue to grow the online stuff?
Games -- Can they keep the high margins is the other key question of course!!
In his weekly roundup Phil Oakley, a well respected analyst now working for Ionic who platform ShareScope and SharePad, includes analysis of Next on pages 9 through 13 of pdf file in following link:
He points out affect of interest payments boosting profit margins and estimates profit margin if interest payments removed. I remember some years ago reading an article that pointed out amount of profits made on Next's credit card and that this was under threat as customers switched to credit cards with lower interest rates.
"This morning Next published a good Christmas trading update. In November the board guided Christmas sales to be down -0.3%. However, Christmas period sales were up 1.5%. This resulted in a small increase to FY18 (to Jan) PBT guidance from £717m to £725m. Note the shares trade ex-div of a 45p dividend tomorrow.
The shares were up strongly on this news, mainly due to the better than expected sales growth but probably also due to a mini short squeeze (Next is one of the most shorted stocks 6.8%). But the outlook statement is less positive, highlighting the pressures on high street retailers and the UK consumer, and guiding FY19 profit of £705m (down 3% on FY18s £725m guidance).
This theme is likely to sustain and although Nexts significant on-line business is growing, as a group the top line is declining. We prefer to avoid negative growth companies. Long term we expect the shares to underperform and change our recommendation from HOLD to SELL""
Full article: https://www.beaufortsecurities.com/img/pdfs/research/next030118.pdf
The cynic in me feels that the decision to revert to share buybacks was in order to ensure that EPS growth will be in positive territory next year - assuming their prediction of £705m profit is correct.
Notwithstanding, a forward PE of around 11 doesn't look too challenging for me; although, I agree with Bill that there's probably not oodles of upside at the moment.
"I suspect that the above opinion was gained from looking at linear share price charts... as an investor the important thing is percentage change over a period... The 10 year trend for NXT is 25.0% pa. Going further back, charting SP with a log price scale back to Jan 1996 gives a trend line of 12.8% pa..."
Yes, Rhigos, a fair challenge - I was really just musing aloud. But the thing is, all of that is backward-looking - the world is changing rapidly for NXT, and they no longer enjoy the relative advantages they once did. I suspect past SP performance really is no guide to future... etc, with this one, and it's now harder than ever to know what was the truer and fairer reflection of intrinsic value... £80, £37 or somewhere in between.
As I've surmised before, the valuation metrics can certainly support £50 or so, but maybe not a whole lot more on top.
"I am not generally a fan of share buy-backs but NXT management do it well and I like the capital gain it brings better than special dividends. They do not buy-back if they consider SP above fair value for company. "
I AM generally a fan of buy-backs - wherever conditions are conducive - but I know that opinions are mixed here, particularly among private investors (not that I think buy-backs are at all well understood in this community). But I would commute your statement to "NXT management DID it well, UP TO A POINT..."
Yes, Wolfson's policy is (or at least was) transparent and disciplined, certainly compared to many, but it still means they were buying-back quite a lot of shares at a substantial premium to the current SP in the relatively recent past. Okay, perhaps they have the excuse of being overtaken by unpredictable external events - but this cannot excuse the decision to replace buy-backs with specials, right at the bottom, a major misstep by Wolfson IMHO (and I said as much at the time, on these pages). Maybe this move to switch it back to buy-backs will come to be seen as a timely correction... or maybe the wrong way around, once again? Either way, Wolfson's reputation as Master Capital Allocator has taken a knock, and still to recover...
Edited highlights below - they are negative on the shares. All in all, market forecasts will go up c.1% for FY18 and FY19 - with questions over the allocation of surplus cash:
"... the more important newsflow today is not the group's performance over Christmas, but its financial guidance for FY 2018/19. This is the first time that management has provided guidance for the new financial year, and at this early stage the range of outcomes is understandably wide... No profit guidance range has been given, but the company makes clear that at the mid point (ie sales growth of +1%) it would expect to deliver profits of around £705m. The current consensus average is £696m, so this is also consistent with a c1% upgrade to consensus...
We also think it worth noting that the company has indicated today that it intends to return c£300m to shareholders via share buybacks in FY 2018/19. Whilst Next has been returning excess capital to shareholders for many years, and the quantum indicated today is unlikely to surprise anyone much, we think the fact that the company is intending to use buybacks rather than special dividends (as it did last year) is noteworthy. The bulls will argue that this will enhance EPS by c4% and that it is a sign of management's long-term confidence in the business. The bears will argue that, without special dividends (180p per share last year), the yield comes down to less than 4% and that buying back shares in a company where profits are declining (as management guidance implies) is, in the long term, likely to be value destructive."
Bill1703, " lest we forget, NXT has spent most of the last 30 years down below £20, and the period (£60-£80) between early 2014 and early 2016 (a blink of an eye, really) could eventually prove the anomalous exception rather than a reasonable rule... "
I suspect that the above opinion was gained from looking at linear share price charts. These tend to make it look as if all the big movement in SP occurred over a short period of time, which in absolute price terms they would have but as an investor the important thing is percentage change over a period (perhaps months or years).
The 10 year trend for NXT is 25.0% pa. Going further back, charting SP with a log price scale back to Jan 1996 gives a trend line of 12.8% pa. Up to May 2007 SP did not fluctuate that much from 12.8% trend line line then fell sharply during recession. From Oct 2008 SP rose a lot faster than 12.8% pa. From Nov 2015 high of £80.15 following profit warnings it fell to a Jul 2017 low of £37.66.
I am not generally a fan of share buy-backs but NXT management do it well and I like the capital gain it brings better than special dividends. They do not buy-back if they consider SP above fair value for company.
"... always had confidence in NXT management and believed that SP would tend to revert to mean trend. To get back to 10 year trend line SP would have to rise to £83. That looks unlikely but £70 within a couple of years may happen..."
I think the market likewise retains its confidence (rightly or wrongly?) in management - hence once again the "exuberant" +8% reaction to a c.1% increase in profit forecast. The long term track record demands respect, of course - but offers no guarantees going forward. And they are still looking at another down year for profits in FY19, on Wolfson's current central case.
Interesting comment on headwinds easing into the new year, with specific detail on cost price inflation levelling off - we knew this already of course, as widely discussed on other retail stock boards, but now Wolfson has said it, it becomes a real "thing".
"All those special divs in the meantime are a nice bonus!"
Interesting that they are committing to buy-backs rather than further specials for the surplus cash (forecast £300m) in the year ahead - this won't go down well with everyone, though again could be construed as reflective of Wolfson's confidence.
£50 doesn't look too demanding at all here, but beyond that? Harder to know... lest we forget, NXT has spent most of the last 30 years down below £20, and the period (£60-£80) between early 2014 and early 2016 (a blink of an eye, really) could eventually prove the anomalous exception rather than a reasonable rule...
"Games - how will the market react" SP +9% so I would say exuberantly!
Glad I bought more a year ago after profit warning but sorry I took profits on that purchase by selling 25% of my NXT shares in May. I have always had confidence in NXT management and believed that SP would tend to revert to mean trend. To get back to 10 year trend line SP would have to rise to £83. That looks unlikely but £70 within a couple of years may happen.
NXT is 2.9% of my share portfolio of 45 shares.
British clothing retailer Next upgraded its full-year profit forecast after it beat guidance for sales in the run-up to Christmas, as colder weather helped sales of winter clothes.
Next said total full price sales rose 1.5 percent in the period from Nov. 1 to Dec. That was ahead of company guidance for a fall of 0.3 percent and follows third quarter growth of 1.3 percent.
The retailer upgraded its central pretax profit guidance for the full 2017-18 year, forecasting 725 million pounds, up from previous guidance of 717 million pounds but below the 790.2 million pounds made in 2016-17.
Next forecast full price sales growth of about 1 percent in the 2018-19 year and another fall in profit to 705 million pounds, with costs growing faster than sales.
"Prompted by a commission to pick my top six stocks for Money Observer's forthcoming 'Wealth Creation Guide', a supplement that goes out in the January edition of the magazine, I've reassessed every share ranked by the Decision Engine.I won't ..."
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I suspect not. The reality is the toughness of the market and the presence (or lack thereof) of shoppers in physical shops rather than sat in front of a laptop.
It is surprising that they have opened some larger stores, but perhaps they see a resurgent high street / mall shopper at some point.
At least the online growth is pretty respectable and it's still making a lot of money -- just less than it was.
The shares are surely still cheap, because the share community thinks all the high street is going to close tomorrow -- when it's probably a little over dramatised.
"The storm clouds gathered over a host of high street retail stocks Wednesday following LSE:NXT:Next's warning that recent sales trends have been "extremely volatile".With Next regarded as a bellwether for UK fashion, jittery investors needed no ..."
"So.... no wider correction any time soon, then??"
Couldn't possibly say becaus rationality plays no part in emotions.
However, it does appear that the market is correcting each stock individually as they announce results and people wander off in a pique of panic.
"Can't see any horror stories here, as usual the report is refreshingly candid. They announced another 45p special dividend for January... They also tightened the range for Q4 forecast, as I guess they already have some better visibility."
Yes, Games, can't see pretty much anything of significance here, that might rationally change anyone's outlook - yet the stock is down 6-7%?!
We already knew about the latest 45p special though... and the ongoing buy-backs with the residual "excess" free cash flow, over and above.
It is the way of this market, increasingly - perfectly reasonable figures and/or outlook, and your shares are market down 6%, 7%, maybe more... it's getting to the stage where, if any of your stocks come out with figures or a trading update and the SP is only hit 3-4%, you are doing cartwheels in the kitchen!
Still, you can read this trend as good news, perhaps.... it is the exact opposite of the glass-half-full excessive and accelerating exuberance which often precedes a market crash. So.... no wider correction any time soon, then??
BTW 7% down from recent highs, juicy divvies coming soon, shorts reduced, share buyback in place and positive outlook make this (IMHO) a Strong Buy into 2018 at current price (4890p). I'm expecting £55 by end 2018.
Britain's retailers have been treated to an Indian summer of sales with the high street enjoying its best September sales for five years, according to new figures from BDO.
Like-for-like sales increased by 2.9pc last month, the best monthly high street sales figures since April 2014, as some department stores reported some shoppers were already buying early Christmas presents.
Quick-off-the-mark festive shoppers were also credited with boosting online sales by 30.4pc, the biggest increase since January 2015.
"It's not been the best of weeks for UK-listed stocks, but there's been no shortage of impressive stock moves.The @GB:ASX:FTSE All-Share closed below 4,000 for the first time since early May, having shed 2% this week. The @GB:UKX:FTSE 100's fared ..."
"... it suggested that Lord Wolfson didn't consider the stock to be materially undervalued. Now he does. This is a big shift."
I agree, Afrosia, that the market is reacting well to this in particular. But I have caveats.
It's only really partly addressing a major misstep by Lord W, IMHO. Which merely served to confirm the suspicion - of many - that when it comes to buy-backs, companies generally tend to make the same crucial mistake that too many investors do... buying when things are booming, and the SP reflects this, and losing nerve too quickly when the going is tougher - which is exactly when your stock is likely to be "materially undervalued".
This has seriously dented Wolfson's reputation as a master capital allocator. He was last buying shares back at well above £70... shortly before his SP halved. So why should he be any more "right" now? It has often been observed that, however bad many investors are at valuing stocks, among the worst at it consistently are company managements... so maybe Wolfson is no better, after all?
Whatever... good luck to those buying in around £40, give or take, I actively considered it and held off (though partly as I saw even better value elsewhere in UK retail - and backed that with my money). It could well be that £50 really is the right price here, for now... but if so, then I am more than ever convinced that MKS is worth £4.50!!
indeed - buybacks and dividends and specials all in one year -- is it Christmas?
AF -- I think it's more to do with the realisation that the whole thing isn't going to hxll in a handcart and the business is still relevant.
Although, this is only one reporting round of course -- I'd like to see them beef up the online and reduce some of the store footprint.
Games -- even MKS jumped up in sympathy this morning.
The key takeaway for me is that we will generate £53m in excess of previously expected cashflows and that this will be spent on buybacks.
My primary source of concern and reservation on Next has been the decision to pay special dividends rather than share buybacks, as it suggested that Lord Wolfson didn't consider the stock to be materially undervalued. Now he does. This is a big shift.
""""The discount chain is close to leapfrogging Next as the UKs second biggest clothing retailer behind Marks & Spencer after claiming a significant increase in UK market share as its annual sales jumped 10 per cent.""""
Something tells me this is going to come unstuck at some point, as it must surely be so cost sensitive and consequently a dip in volume, or an exhaustion of store roll out might see a change in fortunes.
Omaha - don't you think the Next situation is clustered with known knowns? It's a few days away from results and the expectations are already expecting a further fall in profits, yet the share price seems to be hardening.
It's either a fall in the level of pessimism here, or the numbers have been leaked and there is a surprise to the upside.
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