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Next - Guidance nudged down again

George Salmon | 4 May 2017 | A A A
Next - Guidance nudged down again

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Next plc Ordinary 10p Shares

Sell: 7,824.00 | Buy: 7,830.00 | Change 42.00 (0.54%)
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Full price sales growth of -3% in Q1 is at the bottom end of Next's previous guidance, as expected. Total sales, including markdowns, were down 2.5%. The group has narrowed its profit guidance for the rest of the year to the lower end of previous expectations. The shares fell 3.4% on the news.

Our View

After starting last year at over £70, Next shares now change hands for under £42. While it's true that industry-wide headwinds have hampered the sector generally, Next has plenty of its own issues to contend with.

The vote to leave the EU caused the pound to drop dramatically, which is bad news for most UK retailers as it makes imported textiles more expensive. To combat this, Next is raising prices by up to 5%.

While the alternative (holding prices steady and taking the hit on margin) is probably less palatable, this increase could put off shoppers in such a competitive sector, particularly as inflation has started putting the squeeze on disposable incomes. CEO Lord Wolfson also has long-standing concerns that consumers are shifting spending away from clothing and towards casual dining and entertainment.

In addition to these factors, Next's Directory (online and catalogue) division is struggling to deliver the double-digit sales growth of times gone by. Competition is coming from all directions, with online-only players like Boohoo and ASOS taking market share, and other more traditional retailers significantly raising their game. Difficulties with the Summer 2017 range haven't helped.

Steps are being taken to improve the mobile app and modernise the online proposition, but it remains early days. Directory contributes more to profits than the high street Retail division, so rectifying the problems here is crucial for the group.

Next has historically been very well run. It still earns class-leading margins of over 20%, which helps it generate significant surplus cash. In the past, Next has used this cash to buy back its own shares when the price fell below a set level, arguing that it represented better value for shareholders than paying special dividends. Investors may raise an eyebrow when they see that the group has moved to focus on specials rather than buybacks this year, despite the share price fall.

The shares are trading at 11 times forecast earnings, below many of its peers in the sector, and its own long-run average.

First quarter trading

In the 13 weeks to 29 April, Next Retail sales are down 8.1%, with the Directory business growing 3.3%. The group notes that sales trends improved through the quarter, although this has been attributed to a later, warmer Easter weekend.

While some improvements are expected in the coming weeks, Next still does not expect to have its ranges where it wants them until the Autumn season.

With real wage growth now close to zero, Next has reiterated current conditions in retail are challenging, particularly in the clothing and homeware markets. Previous guidance was for 2017/18 profit before tax of between £680m-£780m, and this has been lowered to £680m-£740m, with full price sales for the year now expected to be between -3.5% to +0.5%.

The group has now paid the first of the 4, 45p special dividends it expects to pay over the year.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.