Let’s start with a New Year resolution for long term investors. While day traders must seize the moment if they want to make a quick buck, those with a longer-term horizon should resolve to look before they leap. Better to let a chance go and search for the many opportunities that lie elsewhere than to make a hasty investment decision and repent at leisure.
That message was flagged up when Next (NXT) was the first retailer to report on Christmas trading and it was a better than expected update. Some investors mistakenly thought that “better than expected” is the same as “pretty good” and the shares leapt from £45 to £49 at the opening.
Some of this gain was no doubt down to short sellers closing their positions – this was one of the most heavily shorted stocks on the London market – but Next still closed up £3 on the day as investors savoured news that full price sales were up 1.5% between 1 November and Christmas Eve compared with the same period in 2016. That in turn meant that less stock had to be sold off cheaply in the festive sales.
This was certainly better than the flat sales performance in the previous nine months but when you consider the 1.1% of extra space that had become available it was still quite anaemic. Furthermore, all the gain had come from increased online sales, with store sales down 6.1% in the Christmas run-up and 7.2% down for the year.
Nest was able to edge up its guidance on full year profits to the end of January but even so, profits will probably be down 8.3% even assuming that January works out reasonably well.
We have been fed for so long on a news diet of Brexit blues and squeezed wages that any kind of reassurance was devoured with delight and shares of other retailers, most notably Marks & Spencer (MKS), rose in unison. It does not necessarily follow that what is happening at one company will be reflected across the sector. In the past Next has grown sales when M&S has struggled and vice versa.
Market Euphoria Fails to Last
This euphoria lasted just one day as Debenhams (DEB) pulled forward its own update accompanied by a profit warning. Sales were down in the 17 weeks to 30 December, which meant more goods went into the clearance sales, when prices had to be reduced drastically or, as Debenhams quaintly put it, there was “further markdown investment”. Margins as a whole will be 150 points below the previous year.
Not for the first time, Debenhams has proved to be more adept at creating fanciful phrases such as “tactical promotional action” and “a clean end-season stock position”. It has opened its first “right-sized” store at Uxbridge, which raises the question of whether all the other stores are the wrong size. Perhaps the Debenhams directors, with their colourful use of English, should write this column and I’ll run the stores.
The general tone was in line with the proviso on the end of the Next statement that “many of the challenges we faced last year look set to continue into the year ahead”. These include subdued consumer demand and higher costs. It could be well into 2018 before the headwinds ease, according to Next.
We need to see more retail updates to get a clearer picture of the sector and analysts are divided on the outlook. Beaufort Securities reacted immediately to the Next update by downgrading its recommendation from hold to sell, with a target price of £40. Within 24 hours HSBC upgraded from reduce to hold. Meanwhile Debenhams shares have lost half their value over the past 12 months and are likely to continue to slide. It’s a sector I tend to avoid, with good reason.
