Next opts for dark winter tones

Next says trading has been "volatile" - so is its guidance

Next guidance is becoming almost as volatile as the ‘fast-fashion’ trends Britain’s No.1 clothier is pedalling furiously to catch up with.

Weather again

The more optimistic gloss on full-year expectations coating its half-year report is gone from Wednesday’s final interim update, even though the group reports a second consecutive quarter of hard-won full-price sales growth, tightening odds that it will hit the slightly negative midpoint of the year’s growth range. But Next’s run of bad luck with the weather also struck again in October. Slightly more clement conditions than usual whilst Next was beginning to roll out winter ranges pulled trading below more bullish third quarter forecasts. In turn, gloomier expectations for all-important Christmas and spring trading that had begun to lift in recent months have been reinstated.

Directory continues to shine

It’s worth noting that the upward rating implied by the shares’ 33% rise between the beginning of August and early October required a better woven performance over the quarter than the one reported. Consequently some of Wednesday’s 6%-9% stock slump can be put down to a correction of over-optimism than an outright rejection of the level of growth Next continues to forecast for the year. Another double-digit rise in Directory sales, the driver of overall growth this year, has emboldened the group to lift its profit forecast despite trimming 25 basis points off the better end of the sales outlook.

Guidance upgrade

However, it is almost certainly the more pessimistic tint to guidance for Q4 that has tipped improving sentiment on Next shares off a precarious perch. “We believe the most reliable guide to sales for the balance of the year are the full price sales for the year to date, which are down -0.3%.” Even the fresh round of special dividends announced on Wednesday and confirmation that the remaining £25m of a mooted total of £50m in buybacks would be triggered hasn’t cushioned the stock. We would even suggest that now, having overshot on the upside somewhat, that sentiment on the shares price—down 13% in a month—has swung too far into pessimism. With the year’s profit decline now forecast to be more contained than before after a helter-skelter year and a superior cash generation trend intact, we see Next shares as likelier to fade into year-end than dive.

Chart lines

Next’s share price chart depicting Wednesday’s hurried decline reminds us of the power of price gaps. Note the one that opened to the upside price on 13th  - 14th September was has now, belatedly been filled. In fact, the same goes for another one that appeared in this volatile stock at the very beginning of the year which was not entirely resolved till today. Ironically, the stock has now opened a further divide between the price buyers were willing to offer and that which sellers wanted to get out at. It therefore looks like a whipsaw will soon complete higher as the market fulfils hanging orders between Tuesday’s low, 4885p, and Wednesday’s high of 4707p. Aside from that not a great deal has changed in the chart since our last look around 7 weeks ago. The magnetic effect of a 4497p-4393p pivot, in place since the Brexit vote, continues. As does the apparent cap on prices much higher than 5108p. The next most important point to watch is whether aforesaid support holds in the current down leg. If not, 4023p may be needed, having survived a September bear attack. With momentum as measured by RSI now at least theoretically oversold stabilisation of the stock looks likely within the relatively near term

Figure 1 - Next Plc. price chart (daily intervals)

Source: Thomson Reuters and City Index


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