Clothing-to-homewares colossus Next’s (NXT) shares are marked down 5.8% to £41.53 on yet another round of earnings downgrades.
CEO Simon Wolfson reports a worse-than-expected 8.1% slump in first quarter retail sales. He also spooks investors with the revelation even the downbeat outlook issued in March, when reporting a first profit decline in eight years, was overly optimistic.
Lord Wolfson (pictured below) had already flagged that the first quarter update would be at the lower end of the guided full year range back in March, so today’s update is broadly in line with expectations.
Full price sales are down 3% for the thirteen weeks to 29 April despite a boost from the later, warmer Easter, with retail sales slumping more than 8% and online and catalogue arm NEXT Directory’s revenues rising 3.3%.
However, guidance for the full year to January 2018 has been massaged down. While the lower end of the PBT range is maintained at £680m, the upper end is reduced from £780m to £740m, implying a best-case-scenario 6.4% year-on-year profits decline.
CLOSE TO ZERO
‘The UK consumer environment remains challenging, particularly in the clothing and homeware markets, and real wage growth is now close to zero,’ laments Wolfson, whose charge faces rising online competition, higher costs from weaker sterling, not to mention tough conditions on the UK high street.
Next is also still feeling the negative impact of recent stock management issues. Much-needed core essential ranges are not expected to be up to scratch until the Autumn selling season in September.
Jordan Hiscott, Chief Trader at Ayondo markets, argues Next is unlikely to turn around its fortunes anytime soon. ‘The dominance of Next was once undisputed. Back in 2010, shortly after the global credit crisis, the firm regularly outperformed its industry peers, thanks to its strong presence on high streets and in out of town stores, combined with an efficient online offering.’
‘Fast forward to today and the story couldn’t be more different, with share price having fallen 49% from its 2015 high of 8175p. Unfortunately for the brand, there is a negative pattern not only to the share price but also the sales performance, beginning with a profit warning at the start of the year and culminating with the company trimming its own range forecast today, now capped at £740m.’
‘Make no mistake, the consumer environment across the sector is challenging at the moment. I don’t see this changing any time soon, with the effects of an unpredictable Brexit, another UK election and low wage growth all potentially weighing heavily on the sector.’
RISKS ABOUND
Cantor Fitzgerald Europe’s Mark Photiades sticks with his ‘hold’ rating and £44.25 price target for Next. The analyst highlights a number of risks facing Next including ‘the impact of rising clothing costs as a result of a weakening in sterling against the US dollar and increases in minimum wage rates.’
While the outlook is certainly bleak, Next has a best-in-class management team led by retail grandee Wolfson, possibly the ideal executive to navigate Next through the current choppy waters, while cash flow remains strong.
In fact, even under the worst case scenario, Next expects to generate £255m of surplus cash after deducting interest, tax, capital expenditure and ordinary dividends this year, which it is distributing via four quarterly special dividends of 45p.
