Next offers 20% upside after sell-off

They're always volatile on results day, but some believe the latest dive in Next's share price is an opportunity, reports Graeme Evans. 

Even when the weather is fine and Next is enjoying better-than-expected sales, investors can be relied upon to find something to worry about where retail stocks are concerned.

And so it has proved for one of London’s bellwether stocks, which has tanked 6% today despite a robust second quarter driven by a particularly impressive online performance.

Brand sales were up 2.8% in the 12 weeks to July 28, with online growth of 12.5% offset by a slump of 5.9% for the high street shops estate. Next went into its end-of-season sale with around 20% less stock than last year, with clearance rates so far being better than expected and adding about £4 million to profit.

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As the heatwave is likely to have greatly assisted summer sales, Next points out that some of the second quarter momentum will have come at the expense of August trading. That’s why the company is not upgrading its sales and profits guidance for the year to January - to the disappointment of many investors.

As we highlighted last week, Next shares have a tendency to move sharply in one direction or the other on results day. But looking beyond today's latest volatility, the bigger picture remains largely positive for Next and its followers.

Source: interactive investor      Past performance is not a guide to future performance

UBS, for example, stuck by its 6,600p price target today and described the medium term outlook as positive and on track. It points to the prospect of continued online sales momentum resulting from new projects using AI search engine intelligence or offering customers additional personalisation.

There's also the opportunity to grab market share as more stores close on the high street, with rivals Marks & Spencer Group and House of Fraser among those shutting shops.

But these factors haven’t been enough to budge Next boss Simon Wolfson from his traditionally cautious stance, with his guidance for pre-tax profits of £717 million and full-price sales growth of 2.2% implying a broadly flat second half as the company comes up against tougher comparatives from a year earlier.

UBS is slightly more optimistic, however, as it is forecasting full-year sales growth of 2.4% and a profits haul of £725 million. 

Shares remain well below the £80 high in 2015, but are still up 38% since last August as a run of reassuring or positive trading updates help to prop up confidence at a time of extreme jitters in the retail sector.

Source: interactive investor      Past performance is not a guide to future performance

One reason for the improvement has been Next's share buy-back scheme, which has just returned £300 million of surplus cash to shareholders.

This has enhanced earnings per share (EPS) guidance by 4.7%, with EPS growth in the 2018/19 financial year at 3.7% compared with 1.4% earlier in the year.

Next said today that cash flow remains strong and that it still expects to generate around £300 million of surplus cash this year. UBS has a projected 2019 dividend yield of 2.8% for 2018/19, while its price target is based on a 2019 price earnings multiple of 13.4x.