Sales at Next rose 2.7% in its third quarter to October 27, and the retailer said the volatility of sales performance made it hard to draw conclusions from the period. City analysts share their views on the retailer’s resilience.
“Next’s directory business continues to outperform its retail arm, and is driving sales growth, unsurprising given the retailer’s continued investment in the online channel and in particular its increasing choice of delivery options for shoppers - providing more convenience than other high street retailers. While retail has improved, away from the negative territory of Q3 last year, there is still work to do as new space is driving growth year to date. Its product ranges have improved, particularly in clothing where its offer is much more fashionable, but in preparation for the peak Christmas trading period, the retailer needs to improve its in-store environment and customer service to encourage visitors to its stores to purchase.” - Kate Ormrod, Verdict
“In a clothing and footwear market which remains challenging and uncertain, Next has reported a solid set of third quarter results and has raised its profit guidance for the full year. An improved performance in retail reflects a relative improvement in demand in August and September, which followed this summer’s unseasonable weather conditions. As one of the sponsors of the Olympics and selling official merchandise for the games, Next was ideally positioned to take advantage of the patriotic fervor which gripped the country during this period. Elsewhere, directory encountered more subdued growth, going against tougher comparatives.
“Nonetheless, Next’s well established multichannel proposition - encompassing its online and catalogue offer - continues to represent the retailer’s primary growth driver. Despite more positive recent signs in relation to the economy, the rest of the year is likely to remain extremely challenging for the sector, with consumer confidence remaining weak. However, Next is strongly positioned and we anticipate continued resilience in its performance. Moreover, investment in bolstering its multichannel offer, through more flexible fulfillment options such as next-day delivery, and positive moves to improve the viability and profitability of its store portfolio, leave it in good stead longer term.” - Joseph Robinson, Conlumino
“The City was expecting much more reassuring news on current trading from Next today and has forgiven chief executive Simon Wolfson for misreading the trend back on September 13, so there is no great surprise in the news that September and October saw a strong pick-up, thanks to the much more helpful weather. Overall Next brand sales for the whole 13 week period to October 27 are up by 2.7%, as expected, although Next directory’s normally impressive sales growth is a bit below par at 5.6%, versus an unusually solid -1.1% like for like in retail.
“The difference in the performance of retail and directory has narrowed, and Next said: ‘We believe this is mainly because directory has now annualised the significant benefits of the delivery improvements we made at the start of last year.’ But given the more solid overall Q3 outcome, Next has edged up the bottom end of its range of sales guidance and profit guidance for the year to end January, narrowing full-year sales guidance to a range of +3.0% to +4.5% (with the first 9 months up by 3.8%), with group profit before tax to be in the range £590m to £620m (previously £575m to £620m).” - Nick Bubb, independent analyst
“Having warned that August and early September sales had been disappointing, the rest of the quarter benefited from weak comparables and more seasonally normal weather. While management states that sales remain volatile which certainly confirms anecdotal evidence that industry sales in the last two weeks have been slower, management has narrowed its sales guidance towards the top end of the previous range. While the share price performance is slightly behind the sector over the last one and three months, it has outperformed the AllShare YTD by 20% driven mainly by a re-rating. We believe the shares will consolidate around this level given the greater than expected slowdown in directory and so maintain our hold recommendation. Next is a highly cash generative, tightly run company and looks to continue to execute on the basics of giving the consumer great product and capitalising on its leading multi-channel position.” - Kate Calvert, Seymour Pierce
“Consensus was hard to gauge going into this statement, but, given that directory had seen double-digit sales growth for six consecutive quarters, we expect this to slightly disappoint. On the outlook, the lower end of guidance has been raised. We don’t expect consensus to change and we remain holders. Next had flagged an “unusually quiet” August and early September. As we expected, given the more autumnal weather, trading then improved, with “stronger sales” in late September and early October. The weaker directory growth is attributed to this having now annualised significant delivery improvements. More improvements are expected in the coming months and this may re-boot growth, in our view. Overall, sales remain “volatile”.
“Q4 sales are expected to increase broadly in line with the year to date figure of 3.8%. We won’t be changing forecasts (profit before tax £606m) on this statement. We remain long-term fans of Next but continue to see few near-term catalysts. We moved to hold at the interims and reiterate this recommendation now.” - Bethany Hocking, Investec
“As expected this was a ‘quarter of two halves’, with brand sales in August down due to the Olympic distraction, but September and October brand sales up around 6-7%, we estimate. We attribute this to some delayed spend from August; the colder weather driving knitwear and outerwear sales and continuing small increases in consumer confidence, as seen in our Spend Trend survey. While management noted ‘sales performance remains volatile’, the full-year profit before tax guidance range has been narrowed and skewed upwards.
“Management comments that the more precise profit range is due to greater certainty on costs. It is not clear if they are referring to buying costs, markdowns or operating costs but there are some comments on Bloomberg from a call with journalists saying that while weather in the fourth quarter is likely to be favourable compared to last year’s mild winter, markdowns are expected to be in line or slightly up on last year, and management expects there to be more promotion online this Christmas. Hence we infer that once again Next’s operating cost control has been excellent.
“To be more bullish we would need to see directory resume its double digit growth rate, which would require Next International online sales to become meaningful (they were £33m in full year figures for 2012). We think that’s unlikely and are comfortable with our 5% directory sales growth forecast for 2014 full-year figures, hence we remain neutral.” - Caroline Gulliver, Espirito Santo