Search Share Prices
Next investors take positives as profits fall and will fall again
Profits fell at Next for the third year in a row in 2017 and are expected to fall again in 2018 as falling store sales and good online growth largely cancel each other out and the clothing retailer looks to "attack costs" and "defend sales and profitability".
Group sales fell just 0.5% to £4.1bn in the year to 31 January, below the lowest estimates of any City analyst, as retail full price sales fell 7% but online grew 11.2%.
"In many ways 2017 was the most challenging year we have faced for twenty-five years," said chief executive Lord Wolfson, admitting that self-inflicted product ranging errors and omissions had made a difficult clothing market even more difficult.
"At the same time, the business has had to manage the costs, systems requirements and opportunities of an accelerating structural shift in spending from retail stores to online."
Profit before tax came out at £726.1m, down just over 8% on the prior year but just above the central point of management's guidance. Earnings per share fell 5.6% to 416.7p, helped by substantial share buybacks in the year.
Net debt was £141m higher at £1.1bn and is expected to peak at £1.2bn this year. The business remains highly cash generative, however, with £335m in surplus cash after total cash generated of £882m and £361m returned to shareholders via buybacks and dividends.
Whilst it has been an "uncomfortable year", Wolfson said it has also prompted directors to "take a fresh look at almost everything we do", from the store portfolio, the in-store experience, examining alternative retail revenue streams, the cost base, sourcing and buying, stock management and, "most importantly, our online systems, marketing and fulfilment platform", which has altogether thrown up "many challenges and opportunities".
The central guidance for the year ahead is for sales to grow 1.0%, as store numbers are cut to 528 from 538 but net trading space increases by around 100,000 square feet.
PBT is seen falling another 3% to £705m, "as we expect operational costs to continue to grow faster than sales", Wolfson said.
Retail margins are expected to reduce to around 10% from 12.7% in 2017 and 15.3% the year before, mainly as like-for-like sales continue to fall, while online margins are predicted to increase to around 25% from 24.4%, mainly as a result of the fixed cost base not growing in line with sales.
EPS is guided to increase 1.4% in the coming year, with directors expecting a 4.3% boost from the intended return of £275m surplus cash to shareholders through share buybacks, subject to market conditions.
Wolfson's "action plan" for the new year set clear priorities to continue to improve and develop product ranges, "defend retail sales and profitability", "attack costs" all across the group via innovation and negotiation, and "maximise the potential for profitable growth online".
For online, a new find-in-store was launched before Christmas, to enable customers to locate the 10% of stock that is out of stock online, while by this coming September the plan is to launch a same-day click-and-collect service to allow customers to purchase 'scarce' items online and collect them in a store within one hour. In June, Next plans to enable store-to-store transfers to fulfil customer orders and transfer surplus stock in one store to fill a deficit in another.
"Our long term aim is to further integrate our shops ever more closely into our online trading platform," Wolfson said, helped by deliveries going to most of our stores every day to fulfil online-to-store orders, which means stock can be transferred between stores, depots and warehouses at relatively low cost.
Next shares rose more than 3% to 4,781p on Friday morning.
It was certainly a challenging year, said analyst Neil Wilson at ETX Capital, but there are "bright spots for investors to cheer", notably online.
"But the shift in the sales performance from Retail to Online begs the question as to when Next will look to shift its operations away from stores and focus more on maximizing its Online divisional strength."
While Find-in Store is a useful addition and store-to-store transfers ought to further strengthen the online-retail symbiosis, Wilson said there seemed scope for more rationalisation, with the steady fall in like-for-like sales in retail over the next decade changing the outlook.
"The collapse in profits this year coming off the back of the poor performance a year before makes this more urgent. At present it is hard to get away from the fact that Next seems to have too much floor space - and is increasing it - when consumer habits are shifting so decisively online," he said, adding that investing in cafes may be misguided and unnecessarily prolong the life of stores.
Russ Mould, investment director at AJ Bell, was reassured. "Next's 54-page-long results release is a whopper but it is what is missing from the statement that matters more than what is in it - there is no profit warning, there is no dividend cut and there is no sense of panic," he said.
Morgan Stanley, before speaking to the company, said consensus earnings forecasts are unlikely to change very much. Prior to the release of results, the Bloomberg-compiled consensus was looking for PBT of £706m and EPS of 409p, which put Next on a forward p/e of 11.3x, or 8.7x EBITDA with a 3.7% dividend yield including special dividend payments. MS retained its 'sell' rating, in view of a rating versus a UK general retail sector trading on 12.0x EPS, 7.6x EBITDA and 4.5% yield respectively.
Looking at the year ahead, UBS noted that weather and an early Easter are unhelpful and comparatives against 2017 will get tougher as the year progresses. "However, range and service improvements at Next, and the high level of credit profit, offer some protection. As the year progresses there are risk and rewards from higher industry clearance (from the poor start to the season, potential industry space reduction), but long term upside from what could be a significant year of capacity reduction in apparel and homewares," the Swiss bank said.
Looking at the read-across for the wider retail sector, Jamie Constable at N+1Singer said: "The pricing environment 2019 on 2018 year will be 10% better by year end helped by FX," he noted, with "nothing like" the profit attrition in 2019 as 2018.
"As we have been talking about they see little or no decline in consumer real incomes in calendar 2018 - the trend is H2 weighted. Their financial services business has stabilised following changes to APR's."