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Next - first half sales down 34% but full year guidance upgraded

Sophie Lund-Yates, Equity Analyst | 17 September 2020 | A A A
Next - first half sales down 34% but full year guidance upgraded

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Next plc Ordinary 10p Shares

Sell: 5,948.00 | Buy: 5,956.00 | Change -320.00 (-5.12%)
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Total group sales fell 34% to £1.4bn in the first half, while pre-tax profit was £9m compared to £320m last year. However, sales at the start of the second half have been better than expected, and Next has upgraded its median pre-tax profit scenario for the full year from £195m to £300m.

While uncertainty remains, Next said: "in all our guidance scenarios the Group generates a profit, generates cash and reduces its debts". However, it also added that its guidance has never "been more tentative".

The dividend has not been reinstated at this time.

The shares rose 2.5% following the announcement.

View the latest Next share price and how to deal

Our view

Coronavirus has been a serious headwind for Next. Sales declines of this magnitude would never have been dreamt of in normal times.

However, the group is actually in pretty good shape considering the circumstances. Sales are well ahead of what had been feared and online capacity is back up and running. But what's particularly impressive is Next's stock management - the amount of excess stock that found its way into the end of season sale actually fell year-on-year. That really surprised us, and in a good way.

Retailers are spinning a lot of plates right now, but stock management is arguably the most important. Piles of unsold items can ultimately act as a drag on gross margins and cash flow.

Given the information we have at the moment, it's fair to assume Next is equipped to weather the current disruption. That means the focus should be on the bigger, longer-term picture.

Thanks to its history as a catalogue company, Next has a stronger online business than many peers because it was able to adapt existing infrastructure quickly. This solid foundation means it's well placed to capitalise on the longer-term shift to online shopping that's been triggered by coronavirus. Any big uptick in demand could see margins come under pressure as the group invests to expand its scale, but ultimately we see this as a great growth opportunity, particularly overseas.

The other added benefit is that Next's shops typically have shorter, favourable leases. This is a real bonus and gives the group flexibility when compared to larger or more rent-encumbered peers. We're also impressed with the rate of debt reduction too. While sizeable, debt no longer seems over-burdensome.

Something to be mindful of though is that the ensuing economic slowdown isn't great news for the finance business (where Next customers pay using credit). Bad debts are likely to increase, and what is usually a nice extra revenue stream is likely to flow more slowly as fewer people will pay their interest. Profits are being held back as the group ups its provisions for payment defaults.

Ultimately we think a lot of Next's long-term strengths remain in play. But investors should keep in mind ups and downs in the near term are almost guaranteed, and a price to earnings ratio that's much higher than the ten year average means the shares could be affected if performance disappoints from here.

Next key facts

  • Price/Earnings ratio: 20.4
  • 10 year average Price/Earnings ratio: 13.1
  • Prospective yield: 1.7%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year results

Total Retail sales were down 61% to £345m, reflecting the impact of lockdown store closures. However, the proportion of clothes that ended up on sale was actually better than last year as the group was able to control inventory quite well in the face of slowing sales. The lower sales overall meant operating losses of £175m, compared to a profit of £56m in 2019.

Online sales were still down, but less dramatically, falling 11% to £785m. The decline was mostly driven by the UK, rather than overseas markets. LABEL saw the biggest declines within brands. Despite savings on wage costs, online profit fell 28% to £128m.

Next now expects to close 13 stores this year and renew 60 leases. The group expects rent on these stores to reduce by around 50%. At the end of July the average lease length was 5.5 years, compared to 5.9 last year.

Four locations are going to be trialed as large Beauty and Home store concepts, which are expected to open before Christmas. Next also announced it's agreed terms to operate a joint venture selling Victoria's Secret and Pink products under licence in the UK and Ireland.

The Next finance business has seen no deterioration in customer bad debt. Profits still fell 22% to £59m, which reflects lower interest income and higher provisions in case bad debt increases. Customer payments have continued at the same rate as last year, but the full year outlook assumes customer receivables will reduce by £1bn (-18%).

Despite lower profits, Next generated surplus cash of £347m because of customer receivables which exceeded lending, and proceeds from the sale and leaseback of its head office and a warehouse. That enabled underlying net debt to fall to £764.7m from £1.2bn.

Full year net debt is expected to be around £650m, while full prices sales will fall by 20% under the median scenario.

Find out more about Next shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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 disclosure for more information.