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Next - Conditions now 'somewhat less challenging'

George Salmon | 14 September 2017 | A A A
Next - Conditions now 'somewhat less challenging'

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Next plc Ordinary 10p Shares

Sell: 6,010.00 | Buy: 6,014.00 | Change 30.00 (0.50%)
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Total brand sales fell 2.3% to £1.86bn over the first half, with declines in the High Street Retail division again more than offsetting the growth at Next Directory. This dragged operating profit down 9.8% to £325m.

However, the group said its 'prospects going forward appear somewhat less challenging than they did six months ago', and full year profit and sales guidance is upgraded. The shares rose 8.9% on the news.

Our view

Conditions are tough across the retail sector at present. However, after a pretty jarring 2016/17, Next's half year results exude more optimism.

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 has seen its Directory division come under pressure, with competition coming from all directions. Online-only players like Boohoo and ASOS have been taking market share, and other more traditional retailers have significantly raised their game.

Another issue has been that Next's recent offerings have missed the mark. However, in half year results, the group confirmed its August/September ranges are nearer where they need to be, and are so far selling well. The High Street Retail division is still struggling, but it was also good to see Directory make something of a fightback. Its performance implies the steps taken to improve the mobile app and modernise the online proposition are beginning to pay off.

Next has historically been very well run. It still earns class-leading margins, and generates significant surplus cash. Half year results also brought some optimism here. The group still plans on paying out £257m via four special dividends of 45p, and now intends to distribute a further £53m through share buybacks. The group had previously said it would do this only after considering the 'longer term outlook for the business, market conditions and the prevailing share price'.

However, one swallow doesn't make a summer. Sales were boosted by a scorching June and July, so much of the performance may well have been solar powered. Investors will be hoping for a sustained improvement.

Prior to the price jump after half year results, the shares were trading at 11.2 times forecast earnings, and offered a prospective yield of 3.5%.

Interim results

As expected, Next's Retail business had a difficult half. First half sales of £993m are down 8.3%. With margins falling from 12.4% to 9.0% as a result of the group's large fixed cost base, some one-off cost increases and higher markdown costs, profits fell 33.1% to £89.5m.

Sales in the Directory business rose 5.7% to £868m, with full price sales growth of +7.4%. Margins in the division rose from 24.9% to 25% as efficiencies in overheads and distribution more than offset the impact of a higher percentage of sales being from lower margin items. The result is a 6.3% increase in operating profit, to £217.1m.

While Next is clear that favourable weather provided a tailwind in the second quarter, the group is confident its investments to improve the Directory division, which include taking on 121 new Systems and Marketing staff, are having a positive impact.

Looking ahead to the full year, Next has marginally upgraded its sales growth expectations between -2.0% to +1.5% (previously -3.0% to +0.5%). These higher sales are expected to be partly offset by weaker clearance rates, but the central point of guidance on pre-tax profit is lifted £7m to £717m.

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.