Next investors warm to retail transition
March 23, 2018 5:30 PM
Next shares had a great session - despite a profit warning
Next investors warm to retail transition
For a company that said it expected a third-straight annual profit decline, Next Plc. had a good session on Friday. The stock opened higher and extended gains by as much as 8.7% by the afternoon. Britain’s second-largest clothing retailer by sales also announced its fifth profit warning since the end of 2013 after earnings for the year ending in January matched guidance with an 8% fall. That was supportive of the shares given Next’s high sensitivity to Britain’s unpredictable weather, of which there has been rather a lot so far this year.
There were no significant nasty surprises across the business and operations either, though to Next’s credit, as ever, it did not flinch from detailing how challenging the year had been. It fessed up to exacerbating effects from a weak clothing market with “self-inflicted product ranging errors and omissions”.
More positively it was a year in which Next took significant steps to get ahead of the curve of the changing retail environment, including restructuring and reallocating its cost base. This helps explain why the stock has tacked on 24% so far this year despite the group’s troubles.
Next was also more optimistic about the future. It said it expected the “headwind from negative real incomes to work its way out of the economy in the year ahead”. That would alleviate much of the pressure on consumer-facing firms that have been hit hard by the collapse of the pound in the wake of the 2016’s Brexit vote. Furthermore, the 2018/19 “pricing environment is much more benign” the group said in its statement on Friday, noting it was “not expecting anything like the same level of profit attrition in the year ahead”. Full price sales for core Brand items were expected to largely match the year just past, rising 1%.
It’s worth noting that trimmed guidance was actually catching down with reduced market expectations, allowing investor attention to shift to promising, albeit less defined ways in which the group could secure slightly better growth and profits than expected. These include positive cost effects from reviews of allocation between online and stores that could bring further benefits after a £14.6m charge back to online for order handling. The reduced cost picture has implications for store profitability going forward. Next also forecasts online margins will improve to around 25%, some 60 basis points better.
Financially, the group remains in rude health, with almost all stores profitable. The business continues to generate substantial cash flows, with £882m in 2017, underpinning an ongoing cash return programme. Another £3oom in free cash flow is likely in 2018. Capex is set to rise only modestly to £130m. Yet after the 35% reduction in the year to 2018 it will remain below 16/17’s.
Challenges remain and they could yet worsen for Next, particularly on any repeat of missteps seen in 17/18. For now investors are hanging around, judging that it is managing its retail transition well and continuing to produce lots of cash.
Next stock has respected a rising trend line since July 2017, suggesting the line can support the price for the time being. Prior resistance at 4393-4497p has not been tested as support for over 18 months but is likely to withstand reasonable tests should the stock retrace to that level. On the upside, the main challenge around 5260p, close to highs in October 2017 and at the end of January.
Next Plc. share price chart – daily intervals
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