Thursday 19 July 2018

Good news from Next doesn't mean the UK retail sector is out of the woods

Next CEO Simon Wolfson. Photo: PA
Next CEO Simon Wolfson. Photo: PA

Andrea Felsted

Investors in British retailers are getting the good news first. However, what follows is likely to be more disappointing.

Fashion chain Next returned to its historic form - beating analysts' expectations of full-price sales under the Next brand by some margin.

They rose 1.5pc in the period from November 1 to December 24. The consensus of analysts' forecasts had been for a decline.

Part of the improvement was down to much colder weather in the run-up to Christmas. That should have lifted other clothing retailers too and shares were up across the board.

However, even with a slightly brighter outlook for the British consumer, investors shouldn't count on this turning into a lasting trend.

Next has been trying to improve the balance between having the latest fashions in its stores and enough basic items, such as work blouses.

It also bought carefully, with the volume of its stock going into its sales down 6pc on last year.

Nevertheless, the trends it alludes to are positive for Marks & Spencer, which has been taking some much-needed medicine when it comes to discounting.

M&S has cut back on the relentless special offers that damaged customers' confidence in its pricing and hurt its profit margins.

That might hold back sales growth, but it should be beneficial to margins.

Online retailers, such as Asos ,should also have had a good Christmas. Next's internet arm performed better than its stores and this pattern is likely to be repeated across the sector.

But the outlook is likely to be more challenging for Debenhams and House of Fraser, as department stores are particularly under pressure.

New Look Retail Group has been struggling with weak sales and has the additional worry that it is owned by Brait, in which Christo Wiese is the biggest shareholder.

Next, despite the ups and downs of 2017, remains highly cash-generative. It forecasts £300m (€337m) of surplus cash in the year to January 2019, which it will use to buy back shares.

It has also upgraded its core forecast of pre-tax profit in the year to January 2018 from £717m to £725m.

That's not that much different to its central forecast a year ago, even after the profit disappointments of the past year, underlining its resilience.

With a gain of about 8pc on yesterday, the shares have now recovered the losses that began with a profit warning a year ago.

They trade on a forward price earnings ratio of just over 12 times, slightly ahead of M&S.

The companies face many of the same issues: a maturing customer base, consumers falling out of love with clothing and too many stores.

However, Next has been proactive in managing its real estate and has less heavy lifting to do.

The company's CEO, Simon Wolfson, still expects 2018 to be tough, just not as brutal as 2017.

(Bloomberg/Gadfly)

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