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Next - full year guidance maintained

Nicholas Hyett | 30 October 2019 | A A A
Next - full year guidance maintained

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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: 6,458.00 | Buy: 6,462.00 | Change -270.00 (-4.02%)
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Third quarter full price sales were slightly ahead of previous guidance, up 2% year-on-year.

However, full year guidance remains unchanged. Next continues to expect 3.6% full price sales growth, with pre-tax profits of £725m.

The shares fell 2% following the announcement.

View the latest Next share price and how to deal

Our view

Next's overall sales are in positive territory. That's not something every retailer on the high street is managing.

Next's been able to capitalise on the shift to online shopping, thanks to its history as a catalogue company. Distribution infrastructure was already in place, and could be fired up quickly when e-commerce came knocking. The online business continues to grow rapidly as a result and these days it sells third party brands on the site too, which boosts sales further.

Interestingly, around half of online sales complete through click & collect, and over 80% of returns are made in store. That means Next still sees a place for bricks and mortar, and is behind its strategy to keep opening new shops.

New 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. So far the group's proven adept at securing favourable terms from landlords, but there's no guarantee this will continue.

But Next needs to make sure it strikes the right balance between opening new space to support growth, and not having too many shops. Too much space could be a problem if conditions on the high street get materially worse, although we think management have done well so far.

Something that sets Next apart from its neighbours, is its finance business - offering people the option to buy today and pay tomorrow. Interest income is growing steadily, providing an extra revenue stream.

The shareholder returns policy also strikes us as sensible. 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 2.6% next year.

The shares trade on 14.5 times expected earnings, 15% above their long-term average.

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Q3 trading details

In-store sales declined 6.3%, or 4.8% year-to-date. Online sales were stronger, rising 9.7% in the quarter. That took full price retail sales up 1.6% overall compared to the same time last year.

Sales were impacted by the unusually warm weather in September, although trends in October were much stronger as the weather cooled. Compared to last year, full price sales in these months were up 1% and 5% respectively.

The finance business, which reflects revenue generated when Next customers pay using credit, saw a 7% rise in income earned from interest payments.

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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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