Next shares near a five-month high after Q2 results rally

Its shares have doubled since the March low and our head of markets finds lots to like in these results.

Next (LSE:NXT) has fought hard over the years to earn its reputation as an extremely well-run business, and this update is clear evidence that this continues to be the case.

The company’s knowledge of the industry, allied to tight scenario planning, leaves Next in a position to cut its cloth accordingly. It has been busy trawling through its cost lines during the height of the pandemic, emerging with a raft of measures designed to protect its financial position. 

Quite apart from the more obvious savings washing through from the suspension of the dividend and share buyback programme, there are reductions in capital expenditure, reduced stock purchases, and the hibernation of some core lines for next year. 

At the same time the company is receiving the benefit of reduced business rates and corporation tax, while also engineering other cash inflows, such as the sale and leaseback of its head office and a warehouse complex. As a result, net debt is likely to reduce significantly over the year by some £460 million, which would leave the figure at around £650 million. There is also access to liquidity of £1.6 billion, which in a moderate scenario seems unlikely to be tapped.

Of course, these are the actions within the company’s control. The wider downturn resulting from the pandemic has punched a hole in full-price sales, down 28% in the second quarter, with stores unsurprisingly being worst hit with a decline of 32%. Online sales improved by 9% in the second quarter, with the reduction in customer returns also boosting the numbers. Elsewhere, Next decided to reduce markdown sales on a deliberate basis in order to conform with social distancing requirements, by limiting the number of visitors to its stores after the easing of lockdown restrictions.

The current expectations for full-year pre-tax profit now stands at £195 million, which is a vast improvement to the outlook which the company had previously guided, helped along by a second-quarter performance which came in well ahead of its own expectations.

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At the same time, the company has provided detailed scenario planning which incorporates the potential uncertainty surrounding the UK economy in the near future, as individuals begin to assess discretionary spending in light of the likely difficulties ahead.

In addition, pressures on certain clothing lines remain as the outlook for a general return to the office and formal wear designed for evening events and overseas travel continues to be unclear.

Even so, the reaction to these numbers is one of some relief. The better than expected trading performance of late has been boosted by Next’s own proactive and decisive actions with the result that some of the share price damage has been undone. 

As a result of today’s spike, the shares now stand equal with the level of a year ago, during which time the wider FTSE 100 index has declined by 20%. This also marks a share price surge of 65% since the lows encountered in early April. It remains to be seen whether, in light of this new evidence, the market consensus of the shares as a ‘hold’ will be subject to some significant upgrades.