Next is wiser to weather woes

The retailer is better equipped to withstand a September sales slip

Next Plc., the retailer that vies with Marks & Spencer to sell the most clothes to Brits, has form with coming unstuck in the autumn. The stock has dropped as much as 5.2% on Thursday, even after the £7.9bn group slightly topped first-half pre-tax profit expectations with £319.6m against £316.6m expected. This enables Next to hold on to guidance for the full year that’s a touch conservative relative to firm progress so far this year.

• FY pre-tax profit seen up 0.3% at £725m
• FY full-price sales forecast at +3.6% (+4.3% in H1 after 4.5% in Q1, 4% in Q2)

True, revenues were a little light of the consensus forecast compiled by Bloomberg: £2.01bn vs. £2.04bn estimated. But the alarm is really sounded by the full-price sales dip Next estimates in the current quarter. “Our current estimate is that the third quarter is likely to be our weakest”, the group’s statement says. An exact forecast does not appear to have been provided, though graphically, the company hints that full-price sales growth could be lower than 2% in the third quarter.

Next Plc. quarterly full-price sales growth 2018/19 to 2019/20

Source: Next Plc.

The softness looks due to the sort of ‘payback’ often seen in retail trends, when unusual strength in one month seems to distort performance in a later one. “Our strong performance in July bought forward some August sales”.  And then there’s Next’s long-run of weather-related upsets. This time, a pleasant start to September “adversely affected the last couple of weeks.” Both challenges are a reminder that whilst Next has moved swiftly to modernise in recent years, it still has work to do. After revamping logistics, data handling and supply chains in recent years, Next is in much better shape to face increasingly dynamic, rapid and fickle retail trends. Yet its core business can still be wrong-footed by subtle shifts in consumer behaviour and the wrong kind of weather. And investors know that mild autumns often play havoc for clothing retailers. They can leave operators short of the warmer attire shoppers may still want, whilst stores are left with a few weeks too much inventory meant for colder weather.

But could the market’s cooling attitude to the stock be an over-reaction? Here is an outfit reporting robust and rising full-price sales growth improvement across Online (+11.9% on H1 2018) and brand aggregator Label (+26%). Online sales and credit are now forecast at 57% of the total compared to 40% in 2019. Next’s infamous ‘stress test’ still looks valid too. Next still expects to generate £12bn in cash—that could be returned to shareholders—over 15 years, even if:

1. underlying retail sales plunge 10%
2. online sales barely grow, and
3. Next can only secure terrible long-term leasing terms

What about Brexit? With a Brexit-supporting Tory grandee as CEO, Next has often been a lightning rod for how business is being or might be impacted by Britain’s tortuous EU exit. But on this front too, we detect that a largely Brexit-cautious City has calmed about the risks, at least for Next. Technical no-deal aspects won’t hurt so long as they don’t last. The government’s temporary tariff regime will actually cut £25m from duty Next currently pays. Meanwhile, employment is elevated and wages rising, underpinning shoppers. To be sure, all these conditions are subject to unexpected change. But for now, Next’s full-year prospects are unchanged and solid details in the first half offer decent odds that profits could beat expectations despite the group’s characteristic caution.

Next Plc. chart analysis

• NXT.LN has been capped by formidable resistance for about 15 months. The history of these impediments goes back even further, considering that the stock first broke below 6230p levels in a chaotic pre-Brexit vote collapse during March 2016
• 6224p was tagged by a failed spike higher on July 2018. Around a month earlier, the stock triple-stalled in the 6220’s
• All this after evident support throughout 2014 across the 6090p – 6210p region. It’s now unmistakeable resistance
• In fact, NXT.LN has never recovered from that pre-Brexit vote plunge. As such, it’s unwise to ignore a declining line across many highs since August 2015; further resistance that the shares have reacted to in recent weeks
• The key pattern this year is a gentle though definite wedge stemming from last December. Its lower line has been a prop, though NXT.LN now threatens to go below it; an overhead 21-day exponential trend isn’t helping
• If the structure breaks, it would be a major technical setback. Soft support near 5340 shouldn’t be relied on; a visit back to late-2018/early-2019 lows would be a material risk
• The only way to resolve the tension? See above

Next CFD – Daily

Source: City Index