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Next - A Merry Christmas

George Salmon | 3 January 2018 | A A A
Next - A Merry Christmas

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Next plc Ordinary 10p Shares

Sell: 8,222.00 | Buy: 8,226.00 | Change 48.00 (0.59%)
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Full price sales from 1 November to 24 December were up 1.5% on last year, an improvement on the group's prior guidance for sales to fall 0.3%. The shares rose 9.7% on the news.

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Our View

The last couple of years have been difficult for Next. A toxic combination of rising competition and more challenging economic conditions have seen profits fall.

However, long-serving chief executive Simon Wolfson expects one or two of the headwinds facing the sector to ease in the coming year. That makes his latest assessment of the group's prospects more positive for investors.

Performance has been particularly encouraging in the Online business. While competition remains tough, the division has been turning in better performances since the rise of online-only players like Boohoo and ASOS sparked a revamp of the website and app. Successfully implementing these changes has enhanced our already positive opinion of management.

We've long been fans of Next's capital allocation strategy. Historically, the group has only bought back its own stock when management believe it worthwhile, and has paid out special dividends when the price is judged to be too high to merit a buyback. That makes the decision to earmark next year's £300m or so of surplus cash to buybacks a notable one. Management clearly think the shares have potential.

Despite these positive indications, there are still headwinds. Inflation is outstripping wage growth, meaning income is falling in real terms. Sales in the bricks-and-mortar Retail business are in decline, and a collection of ever-emptier shops will hardly enhance the group's image.

Clearly then, Next is not out of the woods yet. But there's at least reason to think it might be able to see the gaps in the trees.

Prior to the price move on the day of the Christmas trading update, the shares were offering a prospective yield of 3.4% next year, and trade on a price-to-earnings ratio of 11.3, marginally below its longer-term average.

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Christmas trading details

Colder weather in the run-up to Christmas boosted full price sales trends in both the Retail and Online divisions, and has seen Next lift its central guidance for pre-tax profit by £8m to £725m. Depending on sales in January, the final figure is expected to be between £718m to £732m.

Next's online division performed particularly well. Full price sales rose 13.6%, ahead of the 10.4% increase over the year so far.

Full price sales in Retail remain down, falling 6.1% compared to last year. However the drop is less steep than the declines seen earlier in the year.

Looking ahead to 2018/19, the group anticipates full price sales to grow between -2% and +4%, with central pre-tax profit guidance of £705m. Surplus cash flow (after capital expenditure, interest, tax and ordinary dividends) is expected to be around £300m, and is set to be used to fund share buybacks.

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.

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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.