Next — Update 7 January 2016

Next — Update 7 January 2016

Next

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Written by

David Stoddart

Next

Weather or not

Consumer

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8 January 2016

Price

6,940p

Market cap

£10.6bn

Share price graph

Share details

Code

NXT

Listing

LSE

Shares in issue

152.9m

Business description

Next trades from c 500 stores in the UK and Eire, and c 200 stores in more than 40 countries overseas. Online and catalogue business Next Directory sells into c 70 countries outside the UK. Next Sourcing provides around 40% of Next Brand stock from a global supplier base, sourcing from 18 countries.

Bull

Strong management track record.

Highly cash-generative business, funding growing dividends and regular share buybacks or special dividends.

UK real consumer incomes rising.

Bear

Large store base at a time when industry is moving progressively ‘online’.

National living wage and rising business rates represent a substantial challenge to UK store-based retailing.

Strengthening competitor activity online likely to compress returns.

Analyst

David Stoddart

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

We are lucky that Next, one of the shrewdest commentators on retail sector developments, is among the first to update on Christmas trading. It confirms suspicions that unseasonable Q415 weather dented trade. However, there are also signs in the statement to the structural shifts occurring in UK retailing that could negatively affect sector valuations.

Christmas trading statement

Next Brand full-price sales in the 60 days from Monday 26 October to Thursday 24 December were up 0.4%. Next did not discount stock before its end-of-season sale so gross margins were maintained. Stock for the sale was 7% lower than last year and clearance rates broadly similar to last year’s. Hence, Next still expects FY16 PBT to fall within its guided £810-845m range, albeit with a central expectation of £817m that could rise or fall by £7m depending on January trade. This is now at the lower end of the previous guidance range of +4% to +6% year-on-year growth.

Structural shifts evident

Next Retail’s sales declined 0.5% during the period under review. Despite some availability issues, Next Directory increased its sales by 2%. The swing to online is significant. Next’s statement included a chart that showed a negative correlation between y-o-y temperature changes and full-price sales growth, confirming anecdotal evidence from before Christmas that warm weather was hurting sales.

Stores under threat

Online retail sales growth continues to outpace store-based growth. Store productivity is therefore a concern. As stores lose share to online, the UK government has introduced a national living wage premium (that will cost Next c £27m pa over and above general wage inflation to 2020), and business rates, of which retailers pay around a quarter, continue to increase. Given pressure from online, it would be brave to expect price increases to recover these costs. It appears to be a recipe for store closures and the death of some retail centres.

Valuation: Strong platform but challenges loom

Next’s valuation is, arguably, low given prevailing bond yields, management’s excellent track record and the company’s strong position in the online channel. Strong cash generation underpins healthy cash returns to shareholders. However, while Next is better placed than many to deal with the risk of weakening store productivity, it is not immune.

Consensus estimates

Year
end

Revenue
(£bn)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/14

3.8

695.0

366.1

129.0

19.0

1.9

01/15

4.0

782.0

419.8

150.0

16.5

2.2

01/16e

4.2

819.0

432.9

388.1

16.0

5.6

01/17e

4.3

855.0

452.8

339.7

15.3

5.0

Source: Bloomberg

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: TMT

XP Power — Update 7 January 2016

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