Clothing-to-homewares retail giant Next (NXT) reports a pleasing 2.8% rise in full price sales for the second quarter, takings boosted by the UK’s blistering (and prolonged) summer heatwave.
However, shares in the retail bellwether reverse 5.8% to £55.94 as Next leaves year-to-January 2019 guidance unchanged, cautioning sales of summer ranges have been pulled forward from August, implying quieter weeks at the tills lie ahead.
RAY OF LIGHT
Simon Wolfson-steered Next’s resilient second quarter showing and unchanged guidance represents a rare bit of upbeat news for the UK’s struggling retail sector. And yet, commenting on the showing in the second quarter to 28 July, Next injects a note of caution:
‘Full price sales in the second quarter were up +2.8% on last year and ahead of our guidance. We believe that this over-achievement in sales was due to the prolonged period of exceptionally warm weather, which greatly assisted the sales of summer weight product. It is almost certain that some of these sales have been pulled forward from August, so we are maintaining our sales and profit guidance for the year to January 2019.’
Rather than delivering a hot weather-inspired upgrade, Next is prudently sticking with the full year guidance issued in May for a 1.3% drop in profit before tax to £717m, with earnings per share expected to grow 3.7% with enhancement from share buybacks and a modest boost from a lower tax rate.
CASH FLOW KING
Here in May, Shares Magazine outlined the bull and bear cases for Next, still recovering from a 2017 which was ‘the most challenging year we have faced for 25 years’, in the words of respected CEO Simon Wolfson.
Long-prized for its best-in-class retail disciplines and management team, Next also has a formidable record of returning excess cash to shareholders. Today, Next assures ‘Our cash flow remains strong and we still expect to generate around £300m of surplus cash after deducting interest, tax, capital expenditure and ordinary dividends but before financing any increase in online debtors. We intend to fund any increase in our debtor book through long-term bonds and bank facilities.’
Second quarter (Q2) full price sales growth of 2.8% was ahead of guidance, although within the mix there was a slowdown in the retail business, sales down 5.9% versus a 4.8% decline in the first quarter (Q1), although Q1 revenue was helped by much weaker prior year comparatives. Next’s second quarter online sales increased by 12.5%, ahead of the 12% growth called for by consensus.
Updating the market on its end-of-season sale, Next says clearance rates to date are better than expected and have added about £4m to its profit, although ‘this has largely been offset by higher warehouse and distribution costs.’
WHAT ARE THE EXPERTS SAYING?
Liberum Capital leaves its ‘hold’ rating and £61 target price unchanged, arguing ‘the need to service customers on two fronts, in store and online, sees an increase in cost/sales resulting in group EBIT margins falling from 20.2% in 2015 to 18.1% in 2020, on our estimates.
'But while we believe that the UK retail market continues to be structurally challenged, Next benefits from a strong balance sheet, good cash generation, a well-covered dividend and it has relatively low operational gearing versus some of its peers, implying it is able to withstand larger drops in footfall (i.e. sales) relative to other mainstream retailers, and maintain profitability.’
AJ Bell investment director Russ Mould comments: ‘Next chief executive Simon Wolfson is justly known for providing cautious guidance and this looks to be reflected in today’s first half trading update from the retailer.
‘Despite enjoying better than expected trading in the second quarter thanks to the warm weather, the company’s full year guidance remains unchanged. Wolfson and his management team prudently judging that spending may have been pulled forward from a traditional splurge in August.
‘Investors seem to be taking this warning to heart, although it is worth noting the company upgraded guidance after the better-than-expected first quarter performance announced in May.
‘A notable bright spot, given the structural shifts in the retail industry, was a slightly better than forecast 12.5% increase in Q2 online sales.
‘This was lower than the first quarter’s 18.1% build, reflecting the easier comparative with a weak set of numbers for the first three months of 2017.'
