Next downgrade crashes shares to fresh two-year low

So long a star stock and a leader in the retail sector, this high street chain has the same problems as everyone else. Our head of markets make sense of the latest numbers.

A profits downgrade from Next (LSE:NXT) is a rare and unwelcome development, even if it is largely understandable in the circumstances.

While the news may be disappointing at a headline level, a look under the bonnet reveals an engine which, for the most part, is still purring.

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Next is painfully aware of the challenges which it is facing as a group, as well as the retail sector and the broader economy in general. The downgrade is partly due to the weakness of trading in August, which the company is largely attributing to the heatwave and the fact that the consumer was on foreign holidays as the post-pandemic pent-up demand began to unwind.

Even so, the wider concerns of the cost-of-living crisis, an inflationary environment which is being tackled by rising interest rates (and which looks likely to worsen next year given the weakness of sterling, especially against the US dollar) and a more cost-conscious consumer, are all headwinds to be faced.

Set against its own traditional caution, the group nonetheless sees glimmers of hope in the not too distant future. It points to the fact that household savings, which were boosted during the period of lockdown, remain at elevated levels while a near full employment market also affords some leeway for consumers to continue to earn. While the company is suggesting that more radical reforms are needed at the government level, such as questioning some of the larger infrastructure projects and loosening the regulation around foreign workers, for its part Next is continuing to hone its various business lines.

At a time when cost control and general efficiencies become more important in a time of rampant inflationary pressure, the company nonetheless benefits from a strong balance sheet which provides it with significant headroom. Indeed, it has been investing in product and technology improvements, while also revitalising those areas which are displaying the fastest levels of growth, such as its LABEL offering and the overseas business.

The interim dividend payment is accompanied by the likelihood that the full-year payout will at least match that of the previous period. Along with the special dividends which had already been paid, the projected dividend yield is turbocharged to around 7.5%, which has been of some consolation to shareholders as the share price has struggled.

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In the meantime, the steps which the business have taken tell their own story. Revenues increased from £2.12 billion to £2.38 billion, while pre-tax profit increased by 16% to £401 million, ahead of expectations of around £390 million. Full-price sales increased by 12% (and by 22% compared to pre-pandemic levels), while a slowdown in online sales was more than offset by an increase in retail store sales, with an overall jump of 12.8%. The more recent expansion of choice which has been possible given the wider range of concessions and third party tie-ups has resulted in sales per customer having grown by 19% versus pre-pandemic.

For all its good work, Next has been swept into a current which is swirling as a result of wider economic concerns. Retailers are currently out of favour, and although there are few signs of customer default at present, there are some signs of a changing consumer mindset.

The share price has declined by 34% over the last year, as compared to a dip of just 1.4% for the wider FTSE100 and the initial reaction in early exchanges is a further show of investor apprehension towards the sector. Even so, supporters of the stock remain in force given the company’s historic ability to emerge stronger after periods of turbulence, with the market consensus of the shares as a buy remaining in place.