Portfolio

Next sees threats and opportunities for year ahead

By Oliver Haill

Date: Thursday 21 Mar 2019

Next sees threats and opportunities for year ahead

(Sharecast News) - Clothing retailer Next confirmed full-year sales and profits in line with its pre-close statement in January and maintained its central guidance for earnings to grow 3.6% for the year ahead.
Total group sales of £4.2bn were generated in the year to January, up 2.5% on the previous year, while profit before tax was down 0.4% to £722.9m. Earnings per share increased 4.5% to 435.3p, helped by share buybacks.

"Even though the high street looks set to remain challenging our online business continues to increase its contribution to sales and profit of the group," chairman Michael Roney said.

Retail sales fell 8% to £2bn but online sales expanded 14.7% to £1.9bn, with Next brand sales growing 2.6%. Online sales accounted for 48% of group revenues, with retail shrinking to 46% and finance income now 6%.

Net debt ended the financial year increased to £1.1bn due to the growth in Nextpay debtor book, while a final dividend of 110p took the total ordinary dividend for the year to 165p, an increase of +4.4% on last year.

Roney added: "Our core strategy remains unchanged; focus on our customers, products and profitability, continuing to build on the capabilities of our brand and online platform and returning surplus cash to our shareholders."

For the year to January 2020, the group has guided to sales growth of 1.1%, made up of online sales growth of 11% and retail sales down 8.5%, including new selling space. This is expected to translate into a 1.1% decline in PBT to £715m.

The share buyback programme will be continued with another year's purchase of around £300m.

A "big picture" view of the group's future was also provided by chief executive Simon Wolfson, on the changing shape and costs of the high street, threats and opportunities at home and abroad.

This included a prediction that rents and costs will be "MUCH less expensive" (his caps) in the long-term, having in the last two years negotiated rent reductions of 25% and 29%, and expecting similar reductions in the year ahead.

But he saw the changes on the high street still as a significant threat: "The erosion of the advantage Next enjoyed through occupying prime retail space represents a significant challenge to our retail business, and we believe it will be hard for the brand to maintain UK market share in this new world."

"However, as fast as one door closes others open. Specifically, the internet opens up two significant opportunities for the group: (1) the opportunity to leverage our online assets and build a powerful aggregation Platform in the UK and Eire and (2) the ability to build our brand in overseas markets."

An update to the long-term 'stress test' model, which he emphasises was "not a plan or a forecast", implied that group sales will grow 3% over the coming 15 years, with and cash generation of around £12bn, in addition to growing the online Nextpay debtor book by another £900m.

With the results coming in another divisive and confusing week in Westminster and Brussels, he added: "There is still a great deal of uncertainty around the exact shape and form of the UK's future relationship with the EU. We can see no evidence that this uncertainty is affecting consumer behaviour in our sector. Our feeling is that there is a level of fatigue around the subject that leaves consumers numb to the daily swings in the political debate.

"It appears to us that consumer behaviour (in our sector) will only be materially changed if the UK's departure from the EU (or continued uncertainty around this subject) begins to affect employment, prices or earnings. It does not seem to be having any adverse effect on these variables at the present time."

The results had an effect on Next shares, however, as they fell 3.5% to 4,998.5p in early trading on Thursday.

BROKER ANALYSIS

Broker Shore Capital, which has a 'hold' rating on the shares, said sales and earnings were ahead of its expectations, but profit slightly behind.

"In our view, Next remains a well-managed company with an experienced management team and tight stock and cost control," said analyst Greg Lawless, noting that the share trade on a forward one-year PE ratio of 11.8x, an EV/EBITDA multiple of 9.3x and a dividend yield of 3.2%.

"We continue to highlight that one of the favourable characteristics of Next's investment case is the cash generation reflected in the FCF yield of 12.0%."

The results were never likely to be a mile away from consensus PBT forecast of £735m, and so it proved, said Peel Hunt.

"As is always the case with Next's prelims all eyes turn quickly to the outlook statement, which as usual is lengthy and very enlightening," said analyst Jonathan Pritchard.

His take on Wolfson's missive was as follows: "Management is stressing that the consumer is in better shape than it was last year, with real wages rising and employment full. Next sees no reason (notwithstanding a very tough departure from the EU) for the customer to retrench, indeed in its experience, political uncertainty does not affect the behaviour of its shoppers.

"Therefore it is a relatively rosy picture that Next paints, even if it is holding FY expectations unchanged (PBT due to fall marginally). There is a great deal of detail on product channel shift which will be worth a read post analysts' meeting, but in terms of the headlines we see no reason to change our numbers or 'hold' recommendation: it's hard to see how Next could be managing its lot any better but the shares reflect its prospects."

Richard Hunter, head of markets at Interactive Investor, said the difference between the fortunes of stores and online is becoming increasingly marked and the fact that there is a slow transition to this channel "is of comfort, even though the additional costs of transferring in the form of warehouse picking and delivery, need to be carefully managed".

With this in mind, he hailed Next's ability to carefully manage its finances: "Apart from continuing to invest with £129 million of capital expenditure, the company's prodigious cash generation has enabled an increase to the dividend, which was already yielding 3.1% and the completion of another share buyback programme. In addition, subject to market conditions, there will be a further buyback this year."

Hunter said more immediate challenges from an online environment where barriers to entry for new competitors are much lower, plus an increase of 9.4% to net debt, will "need to be monitored closely".

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