Next's full year results are broadly as expected, with NEXT Brand full price sales up 3.9%, underlying profit before tax up 5.0% and underlying Earnings per Share (EPS) up 5.4%. However, the group are cautious on the outlook and have lowered their full year sales and profit guidance. The shares fell by 8% in early morning trading.
Total Group sales rose by 3% to £4.1bn. Year-end net debt was £850m, £180m higher than forecast. This was mainly due to the group bringing forward share buybacks into the last few weeks of the year, at a cost of £151m. Next also returned £341m in special dividends in FY16, while increasing the full year ordinary dividend by 5% (to 158p).
NEXT Retail grew sales by 1.1%, with net new space contributing +2.4%. Retail operating profit growth was +4.8%, due to higher gross margins.
Sales for NEXT Directory, the online and catalogue business, increased by 7.7%, led by overseas and LABEL categories. Growth in the core UK Directory business slowed to +2.3%. Next said this is partly due to competitors catching up with their delivery and warehousing capabilities; and partly a result of changes in the ways customers are shopping online. The group have stepped up investment in mobile, marketing and click and collect propositions to improve performance.
Next are cautious on the outlook for UK consumer spending, warning that 2016 could be the toughest year they have faced since 2008. As a result they are lowering full year guidance for sales and profits in the year ahead.
They now expect NEXT Brand full price sales growth for the full year to be between -1.0% to +4.0%, with a mid-point of +1.5%. Group profit before tax is guided at -4.5% to +4.5%. This compares with guidance given in January for sales growth of 1% to 6% with flat margins. Next point out that there is an upside risk to the numbers if we have a colder winter (the fourth quarter of last year being unusually warm).
Next anticipate distributing £200m to shareholders in 2016/17 through either share buybacks or special dividends, representing £350m of expected surplus cash flow less the £151m of share buybacks bought forward to January 2016.
Nexts very cautious guidance into FY17 is put down to a slowing UK economy, increased uncertainty and volatile clothing sales. But we suspect it also reflects intensifying competition in the online business. So much of the Next investment story has been based around the above average growth generated by the Directory division. So Next's admission that it is struggling to keep an edge over the competition at Directory is a concern.
Over the last five years NEXT Directory has grown sales by 75%. The group have developed two new businesses over this period; an online overseas business and a third party branded business, LABEL. Between them these have added over £300m to Directory's turnover and are still growing strongly. However, growth in the core UK Directory business, which still makes up 87% of divisional profits, has slowed and is some way below what other retail names are achieving online currently. This is a concern.
As well as rising competition, part of the weakness in Directory is attributed to changes in the way customers shop online. In 2010, 95% of orders were placed on desktop PC. In 2015, this fell to 37%, with the balance of orders taken on tablet and phones. Perhaps more surprising is that the proportion of orders delivered to home has approximately halved since 2010 from 87% to 45%, with the balance delivered to store (click and collect).
Next believes there is an opportunity to improve performance by investing in these areas. The group recently introduced a new iPad App, and mobile version of its website, both of which have led to a significant improvement in conversion rates. Further improvements are targeted in both these areas over the next few months. The group will also try to capture more click and collect business by giving customers the option to collect and return goods through third party parcel shops (target rollout September 2016).
We still view Next as a very well-run business, which gives us hope that the investments it is making to improve the online business will pay off. It earns class-leading margins of over 20%. The record on cost control is unparalleled and the group's focus on cash generation over headline growth has been hugely successful. But the crown has slipped.
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