Opinion divided on Next shares

After a drop below £50 for the first time this month, buyers are back. Our head of markets explains why.

As expected, full-year profits at Next (LSE:NXT) have dipped slightly although in line with previous guidance, whilst revenues are ahead of expectations.

The difference between the fortunes of stores and online is becoming increasingly marked. The online business, which has long been the jewel in the crown, continues its growth apace with full-price sales increasing nearly 15% over the period. 

The fact that there is a slow transition to this channel (now representing 53% of sales as opposed to 47% for retail) is of comfort, even though the additional costs of transferring in the form of warehouse picking and delivery, need to be carefully managed.

With this in mind, Next is a business which is perfectly capable of careful financial management. Apart from continuing to invest with £129 million of capital expenditure, the company's prodigious cash generation has enabled an increase to the dividend, which was already yielding 3.1% and the completion of another share buyback programme. 

In addition, subject to market conditions, there will be a further buyback this year. In terms of the key metrics, earnings per share rose 4.5% and are forecast to add another 3.6% in the year ahead, which is a robust achievement given the wider retail backdrop.

Source: TradingView (*) Past performance is not a guide to future performance

Less positively, the Retail performance, where full-price sales declined by 7.3%, is symptomatic of the difficulties which many rivals in the sector are facing. In its usual perspicacious way, Next has outlined its views not only on the bigger picture within the industry, but has also taken a 15-year stress scenario which aims to identify future challenges and the way the business will need to be shaped. 

More immediate challenges are likely to come from an online environment where barriers to entry for new competitors are much lower, let alone the existing ferocity of competition. In addition, whilst containable, the increase of 9.4% to net debt will also need to be monitored closely.

In all, the results add relatively little to the previous guidance in January, but nonetheless represent another year of solid growth, particularly online. The share price has had a good run of late, having risen 26% over the last three months. Over the last year the figure is rather lower, although a 9% increase comfortably outstrips a 3.6% hike for the wider FTSE 100 index.

Investors tend to have high expectations and, for the most part, are usually rewarded. Even so, there is a clear split of opinion on Next's immediate future prospects, such that the market consensus of the shares continues to average out at a 'hold'.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.