Fathoming where clothing retailer Next (LON:NXT) is heading next remains an intriguing task. On the one hand, it is grappling with the retail sector’s structural shift from physical stores to online and ecommerce, while on the other it remains confident about expanding that very bricks and mortar portfolio.
On 21 March, the market was greeted with Next’s forecast of a fourth straight fall in annual profit. The retailer reported a 0.4% drop in pre-tax profit in its 2018-19 financial year, and projected a further 1.1% decline for 2019-20.
But full-year earnings per share (EPS) rose 4.5% and forecast to rise by 3.6% in the current year as Next buys back shares with surplus cash. Read what you will into it, but in a structurally challenged retail market it remains a stock that rewards shareholders.
Despite weak in-store sales, the primary reason behind yet another fall in profits, Next’s portfolio remains impressive with 200 stores in 40 international markets, alongside 500 in the UK and Ireland.
The company's Chief Executive Simon Wolfson remains adamant that its stores will “remain profitable” even if less productive, with plans for a net 60,000 square feet of additional space in 2019-20. That’s just as well, as a 7.3% in-store sales decline in the year to 31 January, was somewhat mitigated by a 14.8% rise in online sales.
From the market’s perspective, Next is perhaps managing a structural shift as best as it can. The retailer has carried out a 15-year stress test on the transition to an online-dominated business. The test assumes an extreme scenario of like-for-like store sales declining at 10% a year for the next 15 years.
Rating agency Moody’s (which has a Baa2 rating on Next), expects the company’s reported EBITDA to again be broadly flat and for debt to edge up in the next year. But the company's credit ratios will “nevertheless remain robust,” it adds.
Despite attempting to prove its deftness at managing the retail sector’s shift to online, the company’s share price has fallen by nearly 30% since hitting a peak of 7,990p in July 2015 (to 5,774p on 18 April 2019)
As for Brexit, Wolfson – a prominent “Leave” supporter and Conservative Party peer in the UK House of Lords – says his company is prepared for all eventualities, including a no-deal exit by the UK from the European Union which could “bring down” prices.
What investors might be nonplussed about is perhaps the company's 2.3% dividend yield for what still remains a pretty pricey FTSE 100 stock. Market consensus points to ‘hold’ rating on Next, as opposed to buying more or selling all. Many believe the share price has some way to fall yet to 5,200p levels (e.g. Jefferies), while others opine that an uptick to 6,200p (e.g. RBC Capital Markets) was more likely given the company is proactively addressing market challenges.
Much will depend on how Next handles what is coming next – the paradigm shift in the retail space it has displayed good cognisance of. So holding firm on your Next position for now might be the right call.
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This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.
Gaurav S.