Next has kicked off the Christmas trading statement season from the retail sector, posting a 1.5 percent rise in full price sales between 28 October and 29 December 2018. However high street sales fell by 9.2 percent, while online sales rose by 15.2 percent. Interest income earned from its nextpay store card customers rose by 12 percent. Contributor Laith Khalaf, Senior Analyst – Hargreaves Lansdown.
Profit guidance for 2018/19 is lowered slightly, by £4 million to £723 million, partly as a result of higher sales from lower margin beauty and gift products (lower margin when compared to clothing sales). £2.5 million of the reduction came from the increased operational costs of higher online sales.
The result is profits for this year are now expected to come in 0.4 percent below last year, though earnings per share will still rise by 4.4 percent as a result of the share buyback plan the company has been executing this year.
Looking forward for the 2019/20 year, Next expects full price sales to rise 1.7 percent, with an 8.5 percent fall in high street sales and an 11 percent rise in online sales. The retailer notes the uncertainty to forecasts posed by divergent Brexit possibilities however.
Next expects to see profits fall 1.1 percent next financial year, though earnings per share are still expected to grow by 3.6 percent thanks again to a planned £300 million share buyback scheme. Shares rose 5 percent in early morning trading. M&S shares also rose 3 percent.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘Next has delivered some Christmas cheer to the retail sector, but only because its online offering is doing so well. Numbers from the high street stores look pretty dire, and tellingly Next expects sliding sales to continue for the next year.
Next has a reputation for under-promising and over-delivering, but even if its forecast of an 8.5 percent decline in retail sales in the next year is a bit wide of the mark, it still paints a pretty bleak picture of the future for high street retail.
Sales towards the end of last year were hampered by the warm November weather, which dampened consumers’ appetite for scarves and mittens, though better trading in the run up to Christmas went some way to redressing the balance for Next.
Next can’t entirely escape the headwinds facing the sector, but it does have some strengths that will help it ride out the storm. The retailer revamped its digital offering which is now going great guns and keeping overall sales heading in the right direction. It’s important to note Next’s high street presence does contribute to this success too, because around half the retailer’s online sales are picked up in store via click and collect.
Next also has a lucrative credit service in the form of its nextpay account, which is expected to contribute around £1 of every £6 in profit this year. Furthermore the company has a level-headed management which has stress-tested its strategic plans using some pretty extreme forecasts for declining high street sales, though these pessimistic estimates are increasingly creeping towards the realm of the possible.
Despite all this, in the immediate future the Next share price is likely to be dominated by proceedings in Westminster rather than on high streets across the UK. Like its peers in the retail sector, Next is plugged into the UK economy, and so Brexit looms large over its short term prospects. If an orderly Brexit somehow emerges from the Westminster fog, we would expect Next shares to rally. Conversely, if no agreement can be reached on the UK’s withdrawal from the EU, shares in Next and other retailers can be expected to take a hit.’