ii view: Next sales decline is less than feared

Sales and profits are suffering under Covid, but will a strong online position be decisive? 

Second-quarter trading update to 25 July

• Full price sales down 28%
• Online sales up 9%
• Retail or store sales down 72%
• Retail like-for-like sales since re-opening down 32%  

Guidance:

• Expects full-year profit of £195 million
• Expects group full-year net debt to reduce by £460 million

ii round-up:

Clothing and homeware retailer Next (LSE:NXT) today reported a 28% drop in second-quarter full-price sales, much better than the 50% fall it estimated back in April at the height of the Covid crisis. 

A return to full capacity at its warehouses underpinned a 9% increase in online sales from a 32% fall in the first quarter to the end of April, while like-for-like sales at re-opened stores were down by around a third. 

Full-year pre-tax profit is now expected to come in at around £195 million, significantly down from 2019’s £728 million profit, but much better than the possible £150 million loss forecast made by management back in April. 

Next shares rose by more than 8% in early UK trading. The stock is down by nearly a fifth year-to-date, although up by nearly 60% since the UK went into lockdown back at the end of March. 

Warehouse capacity had returned faster than Next had anticipated while store sales have proved more robust than it had previously expected.

New estimates for full-year sales now range between a worst-case scenario of down 33% to a best case of down 18%. Management stressed the degree of guess work involved given the possibility of a second wave virus spike. The central case scenario for sales to fall by 26% assumes that sales in the second half are down by 19%.

Sales of children’s wear, home, nightwear and sportswear along with some adult casual clothing have done much better than more formal adult clothing ranges associated with work, going out, overseas holidays and large social events.

Earlier in the year, the retailer suspended both its dividend and share buy back programme in order to conserve cash while its stores were closed. Combined with cash from the sale and lease back of assets such as a warehouse complex, cash saved is now expected to help reduce full-year debt by £460 million to £648 million. Group net debt stood at £1.15 billion back in February. 

First-half results are currently scheduled for 17 September.

ii view:

Next Online usually generates just over half of group profit. It has over 5 million active customers globally and websites serving over 70 countries. Next Retail, usually accounting for around a quarter of profits, operates around 500 stores across the UK and Ireland. These outlets complement the online business - nearly half of UK Online orders are fulfilled through the store network. Next Finance, usually generating around a fifth of profits, provides £1 billion of consumer credit to enable customers to shop. It also operates around 180 mainly franchised stores overseas in 31 countries.

The retailer was quick to spot the trend towards online sales. Its Directory business has grown to offer both the convenience of ordering online and, if necessary, collecting and returning via its store network. Last year, online sales accounted for half of group revenues, retail stores just over 40% and credit finance the balance. 

For investors, outlook uncertainty caused by the pandemic clearly warrants caution. The suspension of shareholder returns compares with a prior policy of paying special dividends on top of normal dividends. But the broader trend of Covid-19 is arguably to accelerate the move towards online sales, a situation Next continues to look well placed for.  

Positives: 

• Diversity of business including a consumer finance business
• Highly regarded CEO 

Negatives:

• Shareholder returns suspended
• Factors outside of its control such as the weather can influence performance

The average rating of stock market analysts:

Hold