Can Next shares really weather the retail storm?

Profit is up, but results are like looking in the rear-view mirror. Our head of markets also looks ahead. 

Next (LSE:NXT) results are, for the most part, pleasing and reflective of the continuing importance of online shopping, particularly during these testing times. However, the numbers themselves are akin to driving using the rear-view mirror and it is the short and medium term prospects for the business which are of particular interest to investors.

The online business, long since the jewel in Next’s crown, continued its progress apace last year, with sales up 12% (and now representing 49% of the overall number) and profits adding 13% (52% of the total).

At the same time, the net margin was a healthy 18.6% and the overseas contribution showed similar strength, with full-price sales up 23% and profit 28%, while maintaining a net margin of 16%.

The headline numbers were also respectable, with an overall full-price sales increase of 4%, which adds vindication to the company’s strategy of not blindly following the crowd and sacrificing price at any number of the various industry markdowns which come along during the course of the year.

In addition, earnings per share also increased by nearly 6%, and the current dividend yield of 4.4% is largely in line with the average yield to be found within the FTSE 100. As a result of strength within the online offering in particular, pre-tax profit nudged ahead overall by 0.8%.

The contribution from retail was rather more of a concern, given both reduced sales (down 5%) and profit (down 23%), due at least in part to the ongoing costs of running a significant store portfolio.

The company has also pointed to the low barriers of entry for new competitors and, in recognition of the imminently difficult economic times to come, made the point that “People do not buy a new outfit to stay at home”. 

The significant downturn in sales which the company is anticipating is reflected in its guidance.

The outlook statement is entirely pragmatic. Rather than provide figures which could well prove meaningless, the company has modelled several scenarios based on differing levels of severity on sales as a result of the coronavirus impact.

Even in its own worst scenario, the company is confident that it can weather the storm. This is due to a combination of factors, such as its ever-prudent balance sheet management, the potential to suspend the share buyback programme, defer the dividend and delay non-essential capital expenditure, any or all of which would reduce the strain on cash.

Despite this logical approach, the shares have largely been at the mercy of generally sour investment sentiment.

At the time of the last trading update in January, the shares had risen 67% in 12 months, prompting some valuation concerns. Fast forward to today, however, and the shares have fallen 27% over the last year, as compared to a 31% dip for the wider FTSE 100.

The market consensus of the shares as a hold is being crimped not by any mistakes of the company’s own making, but rather from a general economic malaise which increasingly looks likely to result in a global recession.

While such a recession could be sharp, but brief, investors are likely to remain "neutral" on Next and indeed the rest of its sector, despite any worries about over-valuation having evaporated.”