Next's share price rally continues after Christmas sales boost
3rd January 2019 10:24
by Richard Hunter from interactive investor
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There was certainly good news for shareholders in this fourth-quarter update, but Richard Hunter, head of markets at interactive investor, also points out some possible problems at Next.
Given recent disappointments, Next has staged something of a late recovery in an attempt to salvage its year, with the share price reacting accordingly.
This is a business which operates on fine margins. Indeed, even a relatively successful Christmas period of trading was crimped by higher sales on seasonal products, where margins are lower and also by increased operational costs.
Nonetheless, the weakness in retail sales for the period, which showed a decline of 9.2%, was offset by the ongoing jewel in the company's crown, with full price online sales rising 15.2%, giving an overall increase which exceeded the previous year by 1.5%.
Next remains a well-managed company which understands its own business as well as the cut-throat sector in which it operates. Careful management of its finances continues to bear fruit against this backdrop, and the outlook for the forthcoming trading year anticipates similar themes, with an estimated 8.5% decline for retail sales but a hike of 11% for online.
At the same time, Next anticipates a cash surplus of some £300 million, which would, in the present environment, be earmarked for share buybacks. This should lead to some support for the share price, while the current dividend yield of 3.8% is reasonably attractive.
Source: TradingView (*) Past performance is not a guide to future performance
Challenges inevitably remain, however, not least of which is the eventual outcome of Brexit. The "unknown unknowns" which remain have resulted in Next deciding not to attempt putting a figure on the impact to the business, and this Brexit-neutral estimate is probably prudent given the circumstances. Meanwhile, the ferocity of competition is showing no signs of slack and the trimming of annual profit guidance is mildly negative.
Whether Next can retain some its former glories remains to be seen among its management of so many moving parts. The shares have certainly been buffeted of late, having dipped 30% over the last six months. Interestingly, however, the shares have actually outperformed over the last year, having dipped 7% as compared to a fall of 12.2% for the wider FTSE 100.
Today's update reopens the debate as to whether Next's glass is half-full or half-empty. There are certainly signs that the company is managing its affairs tightly, but with the outlook for the sector generally still mired in uncertainty, opinion remains divided and the market consensus of the shares as a 'hold' is likely to remain in place for the time being.
*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.
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