Humbled clothing colossus Next’s (NXT) shares are back in demand on Thursday, bid up 7.7% to £43.23 on news of a return to sales growth and relief as profit guidance is left unchanged, reassuring given a recent period of downgrades.
An upgrade to surplus cash generation guidance is also fostering positive sentiment towards the struggling fashion-to-homewares giant.
SOLAR POWERED SALES BOOST
Click here to read today’s well-received first half trading update from the Lord Wolfson-led retailer. Sales patterns remain unpredictable in a retail sector feeling the Brexit pinch, yet Leicester-based Next tightens up full year sales guidance from a 3.5% decline at the bottom of the range to a 3% drop.
The improvement follows a materially better-than-expected 0.7% second quarter uptick in full price sales, reversing a sharp 3% first quarter decline.
The turnaround partly reflects product range and online functionality improvements, but mainly June and July’s warmer weather, a boon for Next’s summer ranges.
With consumers continuing to migrate online, second quarter retail sales reversed by a worse-than-expected 7.4%, although Directory sales surged up 11.4% driven by growth in the UK and overseas.
Encouragingly, pre-tax profit guidance is unchanged at £680m-£740m, although this still implies a 6.4% drop on the cards at the upper end of the range.
The outlook remains understandably subdued: ‘In the current consumer environment we remain cautious and are budgeting for second half full price sales to be down -1.2%, which is in line with our performance in the first half.’
Next’s formidable cash generation is a core tenet of the investment case and the retailer today declares a third special dividend of 45p. In a boost for income investors, it now expects to deliver £307m of surplus cash this year, £50m higher than previous guidance, though it is yet to be determined how this excess £50m will be distributed.
In our recent Main Feature, we suggested share price weakness at Next presented ‘a rare chance to buy a top-notch company on a low rating.’
We also argued: ‘Next has a best-in-class management team led by retail grandee Wolfson, possibly the ideal executive to navigate Next through the current choppy waters. Cash flow remains strong and Next has impeccable capital returns pedigree.’
One City scribe sticking with his bearish stance in the face of this morning’s rally is Canaccord Genuity’s Sanjay Vidyarthi, who maintains his £37.14 price target and ‘sell’ rating. He comments:
‘While there are some early glimmers of hope in this update, we think that the longer-term challenges are still significant in terms of potential investment required in multi-channel, ultimate shape of the UK store portfolio, overseas growth potential and longer-term margin capability of the business.'
