Next (NXT) results for the half-year ending July 2018 were rather reflective, and had plenty of warnings of continued headwinds in the retail sector down the line.
Despite that, and first-half pre-tax profits missing expectations, shares surged around 8% to a shade above £55.00 as fears that its second-quarter sales beat had been pulled forward from third-quarter numbers proved unfounded. It also raised full-year profit guidance by £10 million to £727 million.
The high-street bellwether was at pains to stress that competition from online competitors is not going away, while it warned it was preparing for a no-deal Brexit scenario.
“Given the level of change Next is experiencing, we feel it is important to give as full a picture as possible of how we are responding to the threats and opportunities of a rapidly changing retail world,” the company explains.
It notes that 10 years ago, its retail business accounted for two-thirds of the group’s overall sales and profit. This year, it will contribute less than half group sales and less than a third of group profit. On the flip side, online sales growth has compounded at 10% a year since 2008.
The warnings on Brexit centred on the impact of potential tariffs on consumers, as well as delays at ports. “However, we do not believe that the direct risks of a no-deal Brexit pose a material threat to the ongoing operations and profitability of NEXT's business here in the UK or to our £190m turnover business in the EU.”
The guidance for full-year profits puts the firm in line to meet, or narrowly beat, last year’s figure and would signal 5% growth in earnings per share. Full price sales for the first half were up 4.5% on last year, with total sales up 3.9%. Elsewhere, the interim dividend was 3.8% higher than 2017 at 55p.
Next's share price started the year at £45 and moved above £60 briefly in the summer.
Generally, fund managers tend to be positive on the stock, especially those who manage mandates that focus on large-caps. Its head-start in the online game continues to be seen as a positive.
Broker UBS maintains its bullish £66 12-month target price, which gives potential for 20% gains. Chris Beauchamp, chief market analyst at IG, notes Next’s “relatively low valuation of 12 times forward earnings and strong operating margins” as the key attractions. Not to mention its 3.2% yield.
Caution persists for others, though. Graham Spooner, investment research analyst at The Share Centre, says it looks one of the better positioned in the retail sector.
But The Share Centre’s Profits Watch data shows Next has underperformed the Food & General retailing sector on both revenue and profit growth measures over one- and four-year periods. Next’s profits over the past four years, for example, are down 4%, compared with the wider sector’s 4% growth.
