Shares wobble as Next sends chill through retail sector

Next is better placed than most retailers, but sales have fallen faster and steeper than it expected.

The realities of shopping in a socially-distanced world were laid bare by Next (LSE:NXT) today, with the retail giant braced for significant financial disruption over the rest of this year.

From its guidance in January for sales growth of 3% and profits of £734 million, Next's new worst-case scenario is for a full-year sales plunge of 40% leading to a loss of £150 million. If sales end up being 30% lower, the profits figure would be around £150 million.

Next admits these estimates for the year to January should be viewed as little more than guidance, given that it has never been harder to predict the outlook.

But today's trading update is useful in that it also demonstrates how the company's historic reliance on healthy margins, and high returns on capital, have built a strong base from which to weather the storm.

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Even with the loss of £1.65 billion in sales under the worst-case scenario, cost savings and other measures for generating and retaining cash mean that Next should still be able reduce year-end debt by more than £300 million.

Next's calculations include a saving of £220 million from dividends for the financial year to January, as well as a further £260 million from ending share buy-backs. Yesterday, Marks & Spencer announced it would not be paying a dividend for the 2020/21 year, on top of the £130 million it will save by not announcing a divi with next month's annual results.

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All retailers are in a battle for survival, but it appears that Next is better placed than most. Analysts at Morgan Stanley described the update as “very reassuring”, adding that they have a price target of 5,000p.

This compares with today's 2% decline to 4,691p, which is only back to where Next shares were at the start of a stunning 2019 for the FTSE 100 index-listed stock.

Next's update, however, will still send a chill through the rest of the retail sector. As well as revealing that sales had fallen faster and steeper than it had anticipated in March, its full-price sales guidance for the Christmas quarter points to a decline of at least 17% on a year earlier.

It said:

“We believe that the effects of the coronavirus will be felt for longer than we first anticipated. The economic consequences and continued social distancing will mean that both retail sales and online sales will be disrupted even after full lockdown measures have been lifted.”

Stores are currently being re-purposed for socially-distanced shopping, with the screening of tills, distance marking walkways, sanitisation stations, and exit and entry management systems.

Shops have been closed since 23 March, with plans for re-opening set to focus initially on larger out-of-town sites. Online operations were also forced to shut due to staff safety fears, although these issues have since been addressed to allow up to 70% of ranges to be sold.

Online generated more than half of revenues prior to the crisis, which is why the company's performance over the remainder of 2020 will hinge on how successful it is with increasing the capacity of warehouses within the constraints of safe working practices.

Next is already having to play catch up with internet rivals, with Boohoo (LSE:BOO) reporting last week that it had returned to year-on-year sales growth during April.

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