Better than feared festive sales and an unexpected (albeit marginal) upgrade to full year profit guidance send shares in unloved clothing-to-homewares purveyor Next (NXT) racing 9.3% higher to £49.17.
Some surprising festive cheer from the high street bellwether, usually the first retailer to report on Christmas trading, offers a positive read-across for fashion rivals including Marks & Spencer (MKS), N Brown (BWNG), Debenhams (DEB) and Primark-parent Associated British Foods (ABF), all of which trade higher in early dealings.
LOW EXPECTATIONS
Expectations heading into today’s Christmas update from Next were subdued. Short-sellers, who bet on share prices falling, have had the hard-pressed retail sector in their sights too, which may partially explain Next’s eye-catching share price rally.
Fourth quarter full price sales, covering the 54 days up to and including Christmas Eve (24 December), rose 1.5% on last year.
This is not only significantly ahead of Next’s November guidance for a 0.3% decline, but also shows welcome improvement on the third quarter’s 1.3% increase.
Encouragingly, both the retail store and online channels delivered improved Christmas performances - online business Next Directory did ‘particularly well’ - with Next believing ‘part of this improvement has been down to much colder weather leading up to Christmas.’
Once again, the sales split between brick and mortar stores and the web was stark; while retail sales fell by 6.1%, online sales scorched 13.6% higher.
Buoyed by better than expected full price sales this Christmas and in-line stock clearance rates since Christmas, CEO Simon Wolfson feels confident enough to marginally upgrade central pre-tax profit guidance for the year to January 2018 from £717m to £725m.
Nevertheless, it should be pointed out this follows previous downgrades and the new guidance still leaves Next on course for an 8.3% drop in annual pre-tax profit.
EASING HEADWINDS
Investors also like the more optimistic tone to long-serving CEO Wolfson’s outlook statement for the year to January 2019.
Wolfson cautions that ‘many of the challenges we faced last year look set to continue into the year ahead. Subdued consumer demand driven by a decline in real income, the increase in experiential spending at the expense of clothing, and inflation in our cost prices remain challenges for 2018.'
And yet, he also believes that ‘some of these headwinds will ease as we move through the year; we already know that cost price inflation will reduce to 2% in the first half and believe it will disappear in the second half.’
Wolfson points out that even if sales in the year ahead edge up by 1%, ‘we estimate that group profit would be around £705m. This is marginally down on the current year as we expect operational costs to continue to grow faster than sales.’
Though cautious in its outlook statement, the cash-generative retailer has committed to spend another £300m on share buybacks in the next financial year, which is a healthy indicator of confidence.
