Shares in high street bellwether Next (NXT) fall 2.1% to £50.72, the retailer giving up some of its impressive year-to-date gains.

This is despite Next, one of Shares’ top picks for 2019, reporting annual numbers ‘exactly in line’ with the guidance given alongside January’s cracking Christmas trading update and maintaining its expectations for the year ahead.

The absence of any upgrades, plus an expected decline in pre-tax profit this year, appear to be the reasons behind the share price drop.

Nevertheless, it is encouraging to hear CEO Simon Wolfson (pictured below) say the prolonged income squeeze ‘appears to be coming to an end’ and his charge remains ‘ready for all eventualities’ in terms of Brexit.

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Results for the year to January reveal group sales up 2.5% to more than £4.2bn with pre-tax profits down 0.4% to £722.9m, while Next’s final dividend of 110p takes the total ordinary dividend up 4.4% to 165p.

A TALE OF TWO HALVES

This was a challenging year for Next, beset by rising costs and consumer uncertainty and with the clothing colossus continuing to experience a structural sales shift from its stores to the web.

As has become the norm for the highly cash generative shopkeeper, this was a tale of two halves with online sales (now speaking for 48% of group revenues) shooting 14.7% higher to the best part of £1.92bn and retail sales falling 7.9% to roughly £1.96bn.

Wolfson, famous for the granular detail and fascinating insights he provides with in his statements, explains: ‘The online retail revolution is very similar and is likely to result in similar levels of threats and opportunities for those of us who make a living in retail.

'No one knows what the high street will look like in ten years, but one thing is certain: the people walking down it will be wearing clothes. And hundreds of thousands of people will be employed in the design, manufacture, distribution, marketing and fulfilment of that product.’

In terms of the year-to-January 2020 outlook, Next is guiding towards a 1.1% decline in pre-tax profit to £715m, although share buybacks should help earnings per share to improve by 3.6%.

WOLFSON’S WISDOM

Here’s more from Wolfson on the consumer outlook:

‘Whilst our relationship with the EU remains uncertain, other economic indicators for the consumer look less worrying than at this point last year. Real Earnings in the UK have remained positive since January 2018 and look like they are still gaining strength as we move into 2019.

'Employment rates are also continuing to increase; people in work are earning more and more people are in work. Whilst these increases remain modest, there is nothing to suggest that consumers will feel the need to retrench in the year ahead, the prolonged period of real income squeeze appears to be coming to an end.’

In terms of Brexit, Wolfson says ‘there is still a great deal of uncertainty around the exact shape and form of the UK’s future relationship with the EU.

'We can see no evidence that this uncertainty is affecting consumer behaviour in our sector. Our feeling is that there is a level of fatigue around the subject that leaves consumers numb to the daily swings in the political debate.

'It appears to us that consumer behaviour (in our sector) will only be materially changed if the UK’s departure from the EU (or continued uncertainty around this subject) begins to affect employment, prices or earnings. It does not seem to be having any adverse effect on these variables at the present time.’

THE EXPERT’S VIEW

Russ Mould, investment director at AJ Bell, comments:

‘Investors have tended to applaud any retail company that has hit earning expectations as a sigh of relief that life hasn’t got worse. However, that trend appears to be fading away as Next’s latest reassuring statement isn’t enough to win over the market.

‘Full year results for the year to January 2019 are bang in-line and there is no change to guidance for the new financial year. Clearly investors were expecting something more given Next’s shares have fallen on the news.

‘Next has earned a reputation for being one of the most resilient companies in the retail sector and so expectations are often high when it reports numbers. Over the years it has pleasantly surprised with generous dividends and strong trading. So one can only felt a slight sense of disappointment when the dividend is only lifted by 4.4% and sales growth guidance remains fairly mild.

‘Ultimately the market backdrop continues to make life very difficult for Next and its peers. The full year results continue the theme of Next’s online gain and in-store pain.

‘Next’s job is to adapt and evolve with the changing market and it would be fair to say it is a doing a decent job so far.'

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Issue Date: 21 Mar 2019