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Next shows there’s light at end of retail tunnel after Brexit

Next shows there’s light at end of retail tunnel after Brexit

Shares in Next (NXT) climbed 5% after the fashion retailer delivered some belated Christmas cheer for high street investors, but only those plugged into e-commerce, as the outlook for stores remains challenging.

The retail stalwart kicked off the Christmas trading statement season and delivered investors the gift of a 1.5% rise in full price sales between 28 October and 29 December, following a disappointing November.

While this rise in sales was heartening, it hid the bigger problem lurking underneath: the continued demise of physical shops. High street sales fell 9.2%, while online sales rose 15.2%.

This has led the company to revise down profit for 2018/19 slightly, by £4 million to £723 million – £2.5 million of the reduction was the higher cost of increased online sales.

These trends are expected to continue into 2019/20, although it noted that any forecasts are made ‘with a high degree of uncertainty’ due to Brexit.

‘We have not factored into our sales estimates the potential benefits of a smooth transition or the downsides of a disorderly Brexit,’ it said in its trading statement.

The news saw the shares jump 214p, or 5.1%, to £43.90 and lifted rivals Marks & Spencer (MKS) and Asos (ASC) 3% and 5%, respectively.

The advance extends a rally that began yeserday and claws back some of the 30% decline of the past six months.

Liberum analyst Tom Musson upgraded his recommendation on the shares from ‘hold’ to ‘buy’, describing Next's performance as ‘excellent, considering how bad November was for the sector’. The announcement leaves the share ‘looking oversold’, he added.

‘Next currently trades on a current 2019 price/earnings of 9.3 times, which we think is too cheap given the balance of strong balance sheet and good cash generation with an 8.2% free cashflow yield,’ he said. 

That's a view that Invesco fund managers Mark Barnett and James Goldstone would probably endorse. Next is a top 10 holding in the Keystone (KIT) investment trust Goldstone runs and is also held in Barnett's Invesco Perpetual Income fund and Edinburgh (EDIN) and Perpetual Income & Growth (PLI) investment trusts. 

Other leading fund managers backing the shares include Francis Brooke of Trojan Income and Richard Buxton of Merian UK Alpha, according to Refinitiv Eikon data.

Hargreaves Lansdown senior analyst Laith Khalaf said the high street figures were ‘pretty dire’ but its revamped online offering would help keep ‘overall sales heading in the right direction’.

However, Khalaf said the share price was ‘likely to be dominated by proceedings in Westminster rather than on the high streets across the UK’ and if ‘Brexit somehow emerges from the Westminster fog, we would expect Next shares to rally’.

Ian Forrest, analyst at The Share Centre, said the strength of the ‘relief rally’ on the small reduction in Next’s profit guidance showed ‘just how nervous the market is about the retailing sector’.  

However, he said the shares remain ‘no better than a "hold" for now’ due to economic uncertainty but ‘good cash generation means that share buybacks could be £300 million in the year ahead, which would increase earnings per share by a useful 4.7%’.

The prevalence and importance of online sales did not mean the high street stores were totally redundant and Russ Mould, analyst at AJ Bell, said the company was unlikely to become an internet-only business.

‘Its high street shops could still play a role as a means of showcasing its products and to act as collection points for click-and-collect orders,’ he said.

It plans to run a trial to see if stores would work as delivery points for third-party, non-competing businesses to create a new revenue stream.

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