High street retailers Marks & Spencer and Next rallied in Wednesday morning deals after both beat market expectations with their respective first-half and third-quarter results, though more than one analyst flagged its preference for Next shares going forward.
Within an hour of trading, M&S had taken on 5.5% to 359.6p while Next had added 4.5% at 1,892p. The sector gains helped push the FTSE 100 index up 0.8% to 5,075.2 points.
Marks & Spencer
For the 26 weeks to late September, M&S reported adjusted pretax profit
of £298.3 million—a touch higher than the previous year’s £297.8 million
and comfortably higher than consensus forecasts—on sales growth of 2.8%
to £4.3 billion. UK like-for-like sales slipped a milder-than-expected
0.9% over the year, with general merchandise down 1.4% and food just
0.3% weaker, while international sales increased by 12.2%. The retailer
announced an interim dividend of 5.5p per share compared to the previous
year’s 8.3p, but this had been clearly signalled in advance.
Chairman Sir Stuart Rose said the company is pleased with the first-half performance and added that the group has had “a good start” to the third quarter. Looking ahead, Rose noted: “The market remains competitive and…we remain cautious about the outlook for Christmas and the year ahead.”
Reacting to the results, Shore Capital’s Kate Calvert said she expects full year consensus to move up towards £600 million this morning due to the better-than-expected first half. Shore Capital currently forecasts £590 million, which assumes general merchandise like-for-like sales growth of 0.6% in the full year, flat like-for-like sales in food and retail gross margin down 60bps. For 2011, the broker is looking for pretax profit of £645 million.
“While we suspect M&S will be benefiting from softer comparables along with the rest of the industry, we continue to believe that structural and operational issues may hamper a recovery and result in industry underperformance,” Calvert commented as she maintained her Hold recommendation and said she believes there is better value elsewhere in the sector.
Andrew Wade for Numis Securities this morning moved to raise his earnings forecasts for M&S after banking the first-half beat and rolling the better-than-expected gross margin performance into the second half. His fiscal 2010 pretax profit estimate is now £625 million versus £597 million previously, and for fiscal 2011 is £687 million up from £679 million.
Wade reiterated Numis’ Hold stance on the stock and said that although they would not be short on M&S, the broker continues to prefer Next.
Next
Next this morning announced a stronger-than-expected third quarter in
both its Next retail division and its Directory business. Management has
therefore upgraded its guidance for the second half to reflect Retail
sales ranging from flat to a decline of 3% compared to its guidance in
September of 3.5%-6.5% annual decline. The group anticipates market
consensus for full-year pretax profit will subsequently increase by 7%
to £472 million, which would reflect a 10% year-on-year improvement.
“Next is a well-run, highly cash generative company which we believe will emerge from the recession in a stronger market position,” commented Kate Calvert. “Management has done much to introduce newness in its offer and upgrade its store estate over the last couple of years…This has helped to deliver a robust performance in incredibly difficult trading conditions.” Shore Capital maintained its Buy recommendation on Next.
At Numis, Nick Coulter said that Next’s latest in a series of upgrades underscores the group’s efficiency in converting sales to profits to cash. “We think Next is an ideal stock heading into an uncertain consumer environment,” Coulter commented, citing the retailer’s consistent high single digit free cash flow yield, the likelihood that the group has net funds for fiscal 2012, and the stock’s lowly rating.
Numis today raised its fiscal 2010 pretax profit by 8% to £475 million but is conservatively modeling for fiscal 2011 to be incrementally lower at £465 million. The broker stuck with its Add advice on the Next stock.
