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Next - Easter sun helps sales rise

George Salmon | 1 May 2019 | A A A
Next - Easter sun helps sales rise

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Next plc Ordinary 10p Shares

Sell: 6,380.00 | Buy: 6,384.00 | Change -16.00 (-0.25%)
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Full price sales in the first quarter were up 4.5% on last year. That's ahead of Next's pre-existing forecasts for 3.2% growth, helped by the sunny bank holiday weekend and a much better February than last year.

Still, with a long way to go this year, Next has left previous full year sales guidance unchanged.

The shares moved 1.2% higher on the news

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Our view

While favourable weather lifted the mood last quarter, the UK high street remains a tough place to be. Next's in-store sales continue to nose-dive, as shoppers shift online. The group isn't suffering alone though - many others are grappling with the same problem, and economic uncertainty isn't helping.

Fortunately the company's own online business continues to grow rapidly, and has joined forces with the likes of River Island to sell alternative brands on its website. But, with around half of online sales completed through click and collect, and over 80% of orders returned in store, Next still sees a place for bricks and mortar.

It's a well-considered strategy. Leases are typically short, providing extra flexibility, while management stress testing suggests that even if in-store sales continue to plummet, Next will remain a comfortably cash-generative business. The success of that model relies on Next's ability to negotiate cheaper rents, and so far the group's proven adept at securing favourable terms from landlords, but there's no guarantee this will continue.

Online customers also benefit from Next's finance business, which offers a buy today, pay tomorrow, model, and charges interest for the privilege. Interest income is growing steadily, and provides an extra layer of revenue that sets it apart from other clothing retailers. Keep an eye on the level of bad loans though. These have risen substantially, possibly reflecting a tough economic environment, although remain manageable for now.

The shareholder returns policy also strikes us as sensible, and reinforces our view of Next as one of the UK's better-run retailers.

It 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 - although the stock still offers a prospective yield of 2.9 next year.

At present the shares trade on 12.8 times expected earnings, almost bang in line with its long term average.

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Q1 Trading details

Despite the boost from more favourable weather and a 0.3 percentage point contribution from the addition of new sales space, Next's full price retail sales were 3.6% behind last year.

Meanwhile online sales rose 11.8%, ensuring total full price sales rose 4%. That rises to 4.5% once an 11.4% increase in interest income from the credit business is included.

Looking ahead, central guidance remains for full price sales to rise about 1.7% this year. The group is mindful of the possibility the stronger Q1 could be offset by a weaker Q2, which has tough comparison due to favourable weather last year.

Next continues to expect generating surplus cash of around £300m, which it hopes to return via a share buyback. £86m of this has been completed to date. Recent increases in the share price mean fewer shares can be repurchased, which could potentially reduce the uplift in EPS. Therefore Next is now pencilling in growth of 3.4% rather than 3.6% this year.

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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.

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