Next sales continue to unravel but 'better than expected'

Store sales at clothing retailer Next continued to fall in the second quarter of the year but better summer weather saw full price sales turn positive, though expectations for the second half remain mixed.

A strong online and catalogue performance allowed the FTSE 100 group to modestly narrow sales guidance for the full year, though its profit and dividend expectations remain the same.

Retail sales fell 7.4% in the three months to 29 July, which was an improvement on the 8.1% collapse in the first quarter.

Directory sales increased 11.4% such that total Next brand sales were lifted 0.7% for the quarter, though were still down 1.2% for the first half as a whole.

City analysts had forecast a 3.0% decline in full-price sales but while May mirrored the first quarter with a 3% fall, June was up by 3.0% and July was up 3.9% to give a full price sales increase of 0.7% for the second quarter.

June and July sales were better than the company said and it believes there has been "some improvement in our product ranges and our online functionality" during the period.

"However, we believe most of the increase in full price sales is due to the much warmer weather and, to a lesser degree, lower markdown sales in the end-of-season sale."

Statutory total sales, including markdown sales, were down 2.1% in the quarter and down 2.3% in the first half, although if you ignore the delay in the timing of Directory end-of-season sale despatches this was down 1.6% and 2%.

Management remain cautious in light of the rather wobbly consumer environment and are budgeting for second half full price sales to be down 1.2%.

On the upside, a third special dividend of 45p was confirmed and there is likely to be more in future, with £307m of surplus cash expected this year, up from guidance of £255m in May.

The full guidance range still allows for potential annual sales of 0.5% with the lower end of the guidance range lifted to -3.0% from -3.5%, with the profit before tax range staying at £680-740m.

REACTION AND ANALYSIS

Next shares spike 9% to 4,392p in the first ten minutes of trading on Thursday.

Analyst George Mensah at Shore Capital said it was a "notably improved period of trading" with full prices sales up 0.7%, though retail sales were still "highly underwhelming" at -7.4% versus its own prediction for -4.4%.

"Commentary within today’s statement corresponds somewhat with the thoughts we had recently outlined concerning what may drive performance in Q2; notably improved online functionality (slicker and more engaging customer interface and usability underpinned by a more robust delivery proposition) and warmer weather driving an uptick in full price sell through," Mensah said.

This better than expected quarter should, said Investec's Alistair Davies, help reassure concerns over whether profits can stabilise and the security of its strong surplus cash generation.

"Although trading conditions remain tough and bears will point to ongoing weak trading within retail – we think this misses the point that Next is a well-invested business that in our view has the operational flexibility to deal with structural challenges posed by the sector’s shift online."

On the face of it, not a lot was different, said Neil Wilson at ETX Capital, "sales are still wobbly but the company is still strongly cash generative and can keep up the dividends as promised", noting that the leap in surplus cash has investors eyeing up more dividends.

"Profit guidance is unchanged and it can cover the planned dividends with £50m to spare, which can either be used for more dividends or share buybacks. Either way, the market likes the results and the shares are flying. Fundamentally the business remains strongly cash generative even if it’s not expanding rapidly and is able to maintain solid returns to investors.”

Mike van Dulken at Accendo Markets suggested several reasons why the share price had surged, topped by the fact that sales growth "is an endangered species on the high street" amid fierce online competition and that the increased guidance on surplus cash generation "means potential for greater dividend income" from Next's existing 4% yield.

Van Dulken also noted that the shares were already on the rise, up 12% from last month’s revisit of Brexit lows helped by strong sector sales data: "With 5.14% shares disclosed as major short positions, some of the more recent ones may have been spooked by this morning’s revisit of May highs, electing to reduce/close their positions for fear of a share price breakout gaining traction to worsen their losses.

With his technical analysis cap on, he pointed out that the shares were back above their 200-day moving average, a level not even flirted with since December 2015 when the shares’ kicked off their 54% sell-off to Brexit vote lows. "Should this level now serve as support, it could provide the platform for a more significant recovery."

"Whilst sunny skies helped in June/July, one can look at the Q3 UK weather forecast either way. More good weather could see the company sell even more summer wear. A poor August, however, could just as easily see demand for more Autumnal items begin earlier than usual."

Even after Thursday's rally extended three-week gains to as much as 25%, said Lee Wild at Interactive Investor, Next shares are "hardly expensive".

"Barely into double-digit valuation multiples, they trade at a big discount to both the sector and its own 10-year average. There’s also an attractive dividend yield, including at least two further promised special payouts from surplus cash."