Sales are up but the sector remains volatile.
Next stages relief rally as fears of weather impacts blow away
- Sales in first half up 4.5% resulting in an increase in full year profit guidance.
- Retail environment remains volatile and group highlighted profit from its stores sliding from 67% to 30% over 10 year period.
- We recommend Next as a ‘hold’ but suggest it remains one of the better positioned companies in the sector.
Shares in retailer Next staged a bit of a relief rally first thing today with the shares up 7.5% in early morning trading. This was in response to the company reporting better than expected first half results in which it acknowledged that fears regarding the warm weather and the subsequent result on trading did not materialise.
Indeed, sales in the first half were up 4.5% which was ahead of previous guidance. This has resulted in the FTSE 100 company raising profit guidance for the year by £10m to £727m. Elsewhere, during the period, Next reported a slight rise in profit to £311.1m on the back of a 3.8% rise in revenue to £1.96bn. Investors are also likely to be reacting positively to the news that the dividend was raised to 55 pence (53p).
Despite the positive headlines there remains an element of caution in the air. Interested investors will be aware that the company is known for being conservative and once again it acknowledged the challenging and volatile retail environment. It confirmed that, as expected, sales in its stores continue to be challenging, which investors should be aware of given that this accounts for just under half of its turnover. This was highlighted with figures stating that 10 years ago 67% of group profit was from its stores and now this number is only 30%.
The group also commented on Brexit and the possible consequences of a no deal, with the greatest concerns relating to congestion and delays at ports. Nonetheless, the company did reassure investors that it is well prepared for this eventuality having all the administrative, legal and IT frameworks in place to ensure that the business continues running as it does now.
For investors interested in the retail sector, our view is that Next appears to be a company that is better positioned. However, headwinds remain and as a result, we continue to recommend the company as a ‘hold’ for medium risk investors.
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