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Next - Autumn sales trends not as hot as summer

George Salmon | 31 October 2018 | A A A
Next - Autumn sales trends not as hot as summer

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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: 7,844.00 | Buy: 7,850.00 | Change -262.00 (-3.23%)
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Next has released a very brief trading update covering the third quarter of its financial year.

Both the group's main divisions - Retail and Online -reporting weaker sales trends than earlier in the year, although the performance is broadly as analysts had expected.

The shares fell 3.1% on the news.

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Our view

Next enjoyed a bumper start to its financial year, with sales of shorts and t-shirts boosted by the scorching summer.

Investors are now seeing how sunny weather isn't always retail's friend. A warmer October has likely contributed to Q3s weaker sales trends. That's fair enough, after all overcoats and woolly hats don't exactly fly off the shelves when its 20 degrees outside.

In any case, the British weather can hardly be relied upon for much, never mind a business' long-term performance. It's much more important to focus on the wider issues impacting Next's business.

Extra online competition and challenging economic conditions have been eating into profits, while the group's half year results devoted ten pages to the unknowns around Brexit.

Despite that uncertainty, recent updates have an undertone of cautious optimism.

The Online business has been flying since the group splashed out on a revamp of the website and app, and while sales in the Retail division are still in decline, the group's confident enough to stick to expansion plans.

That's because landlords are willing to offer less onerous and more flexible terms, so positive returns are possible even if like-for-like sales keep falling. It also shouldn't be forgotten the store estate is crucial to the click-and-collect service, which accounts for about half of online sales.

We like this level-headed assessment, although of course opening up new space in such an unfavourable environment is not without risk.

The shareholder returns policy also strikes us as sensible, and reinforces our view of Next as one of the UK's better-run retailers. The group seeks to allocate surplus cash flexibly and efficiently. This means buying back its own stock when management believe it worthwhile, and paying special dividends when the price is judged to be too high for buybacks. Buybacks are the current preferred option.

The shares offer a prospective yield of just over 3% for next year, and trade on 12 times expected earnings per share, slightly below the longer-term average.

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Trading details

Full price sales have risen 2% in the quarter, with a 0.6 percentage point boost from the addition of new sales space.

The rise in underlying sales is driven by the online division, where sales rose 12.7% on the equivalent period last year, and an 11.9% rise in interest income (gross interest billed to nextpay customers). Retail sales fell 8%.

Next still expects full price sales to rise around 3% for the year to January 2019, with pre-tax profit flat year-on-year at £727m. Share buybacks mean that would equate to a 5% rise in earnings per share.

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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.