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Next - A stronger second quarter

George Salmon | 3 August 2017 | A A A
Next - A stronger second quarter

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Next plc Ordinary 10p Shares

Sell: 5,968.00 | Buy: 5,974.00 | Change -36.00 (-0.60%)
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Next has confirmed that full price sales over the first half were down 1.2%, which is around the mid-point of previous guidance. However, full price sales in the second quarter were up 0.7%, including a stronger than expected performance from Directory. The share rose 9% on the news.

The group's third special dividend, of 45p per share, is set to be paid to shareholders on 1 November 2017.

Our View

Conditions are tough across the retail sector at present.

Growth in retail prices, jolted upwards by weaker sterling raising the cost of imported goods, is outpacing wage increases, meaning the average shopper's spending power is diminishing. Next's 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 is coming under pressure, with competition coming from all directions. Online-only players like Boohoo and ASOS are taking market share, and other more traditional retailers have significantly raised their game.

While the High Street Retail division is still struggling, it was good to see Directory make something of a fightback in the most recent quarter. This performance hints that the steps taken to improve the mobile app and modernise the online proposition are beginning to pay off.

However, one swallow doesn't make a summer. Indeed, sales were boosted by a scorching June and July, so much of the improvement may well have been solar powered. We'll be keeping an eye out for signs of a sustained improvement.

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.

Prior to the price jump after Q2 results, the shares were trading at 10.2 times forecast earnings, below many of its peers in the sector, and its own long-run average. The prospective yield was 8.1%, although analyst do not expect this to be maintained, with expectations for 2018/19's dividend roughly half of 2017/18's.

Second Quarter Trading Update

The group says sales in June and July were better than expected. While it is careful to point out that the main reason for this is likely favourable the weather conditions, Next also says it improved ranges and online functionality during the quarter.

Over the second quarter, full price Retail sales were down 7.4% on the equivalent period last year, while full price sales in Directory rose 11.4%. This represents an improvement on Q1 performance in both divisions.

Next went into the July end-of-season sale with 5% less stock, and this, together with lower clearance rates, meant markdown sales are down 14%. This means that underlying total sales in Q2 were down 1.6%, and down 2% in the first half as a whole.

Next has narrowed its sales guidance range for the full year to -3.0% to +0.5%, (previously -3.5% to +0.5%) but has left guidance for profit before tax unchanged at £Â£680m to £Â£740m.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.