Next moves deeper online
Next is taking some high street fashion tips from arch rival Asos.
The chain vies with Marks & Spencer to be Britain’s biggest clothing retailer and—not unlike like M&S—is also facing declining profitability. To beat the street it is spending millions on a race to catch up with its smaller but nimbler rival.
The writing was on the wall well before Next said last month it was “extremely cautious” about the year ahead after reporting its first profit fall since 2009.
Next disclosed a £10m plan to improve online operations and marketing in January, after sales failed to keep up with rivals for a second Christmas in a row. But the decline at the group’s flagship online property had begun some time before, with growth slowing to 3.6% over Christmas year-to-year. At least that was the better than the 2% seen during the 2015 festive season.
Clearly though, at c. 20%, winter web sales growth at online fashion kingpin Asos and 23% at M&S, have concentrated Next’s mind.
Too late to save 2016/17: the group had to ‘catch-down’ to a sharp drop in profit by downgrading its forecast in January. It subsequently matched this in March with underlying profit before tax of £790.2m, down from £821.3m in 2015-16. The outlook for 2017/18 offered in January was also handily confirmed.
Asos, by contrast reported on Tuesday a 31% rise in retail sales over six months, a 29% jump in ‘active customers’ to 14 million, and buffed up guidance for full year sales—now pointing to a 30%-35% advance compared to 25%-30% expected in January.
The impression that the group is eating the lunch of its rivals, particularly Next, is hard to resist. Asos’s volatile stock had good reason to jump 44% last year, and 30% more so far this year, whilst Next fell 30% in 2016. Spanish rival Inditex, owner of Zara, barely managed 2.3%.
A slick web operation is an even clearer differentiator looking at the truly AIM-like rise of boo.com. Its shares rocketed almost 300% over the course of a year.
Next’s answer is labelonline. Part aggregator—other brands are available—part stealthy sales channel. The group hopes it can create a similar buzz among online shoppers as Asos’s website. Next is also pushing ahead with a painstaking revamp of its buying “culture,” processes and logistics, aiming to get from the idea stage to the shop floor faster, like Asos. It patted itself on the back in last month’s earnings for speeding up some lead times—to 3 months.
Asos’s performance was also mentioned last week, when H&M, the world’s second-biggest fashion company, said conditions remained very tough in key European markets and in the United States, with shopping behaviour and expectations changing rapidly. The Swedish group echoed its British high street rival when it said it needed to “be even faster and more flexible in our work processes”. The cloud over the sector thickened when it also fessed up to a 30 percent increase in inventory compared to a year earlier and warned of a risk of increased markdowns.
So has Asos and its online peers got mid-priced fashion retail right and established names got it wrong? Well, that’s questionable. Asos also said on Tuesday that it had cut prices to overseas customers; apparently in a bid to keep its edge in sales growth. Partly due to that, Asos’ retail gross margins slipped by 40 basis points to 47%, although the company said that this was anticipated, while total gross margins fell 60 basis points to 48.3%. A 10-15 basis point drop looked likelier beforehand.
Discounts and lower margins kept profit expectations in check, despite bullish sales forecasts.
Asos, is a UK retailer after all. It accepted rising input costs from Brexit-hit sterling were a factor, though the group has some leeway as it can offset some of the impact with dollar and euro revenues. Still, all retailers will be in the firing line if/when a pinch on real incomes appears.
And, across Europe, a weak 2016 performance by Germany’s Zalando and a worse one by Italy-based Yoox Net-a-Porter is a reminder that simply being on the web alone isn’t enough.
The New Old School
On that basis, the benefits of a more established, more diverse, retailer like Next may come into play. To fund competition, the group’s free cash flow position is crucial. Here there are few concerns, with a rise to £551m forecast after booking £500m in 2016/17. Plus, net receivables from Directory’s credit business have been some £300m-plus above group net debt of £880m, over the last year or so. Again that offers implicit support to valuation. A 4% dividend yield and high cash generation that brings regular discretionary additions to pay-outs are also worth noting.
A lot does, admittedly, depend on Next not stuffing up its new online push. The group will ideally need to report that internet sales growth has returned to low double digits by the second half of the year, partly with help of its new website. If so, a natural reduction of holdings—at least partially—in Asos and its copycats in favour of a switch to Next can be expected.
Also note that the current 3.5% borrowed stock position disclosed to the FCA is the highest concentration of shorts for about a year. That means improved news flow would bring about a pronounced scramble to cover, implying a sharp upward spike.
On the technical charts, the best signification of a coming turnaround might be if the shares achieved escape velocity and put troublesome long-term resistance around 4320p beneath them; sustainably. The shares aren’t there yet. But the chart is now looking more likely to react to positive news.
- Whilst Next’s share price chart underscores that it is among an unfortunate FTSE 100 cohort that has yet to recoup value lost following the Brexit vote, momentum signals are no longer unfavourable. NXT has breached its 21-day exponential moving average and its Relative Strength Index is uncoiling from the severely overbought state seen at the end of March
- The dominant trend still points to the downside but there are signs that the consensus is fracturing, despite the group tagging the aforementioned 4320p resistance late last month
- More seriously the stock to all intents and purposes remains capped by the descending trend from at least February a year ago and trapped within the range of last year’s crash on 24th June
- A nod towards the bull case requires the breach of the descending line on Tuesday to be followed through, if not technical optimism, backed by credible fundamental prospects, could be invalidated
DAILY CHART: NEXT PLC
source: Thomson Reuters and City Index
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