Lack of festive cheer disappoints shareholders in Next

“A downbeat outlook for Christmas trading is weighing on Next today as the High Street bellwether’s shares slump to the bottom of the FTSE 100,” says AJ Bell Investment Director Russ Mould.

“The reaction looks a bit harsh to me. After all, the company is keeping the mid-point of its profit forecasts unchanged, is ticking to its plan to pay a fourth special dividend for the year and pressing ahead with its share buyback programme.

“What seems to have upset the market are the references to volatile trading, unhelpful weather and a forecast which implies sales in the fourth quarter and therefore the vital Christmas period, will be slightly down on where they were a year ago.

“This does feed the bear case that Next has too many stores and faces too much online competition, meaning it could be a potential value trap for investors, in that it is a cheaply-valued company that could get cheaper, simply because earnings continue to disappoint, or even just fail to surprise on the upside.

“But there is always the chance that too much pessimism creeps in. Analysts are already forecasting three straight years of flat-to-down profits and only three of the 25 brokers who follow Next are buyers of the stock – by contrast, nine rate the shares as a ‘sell.’ When times are tough there is a tendency to over-extrapolate from the present and assume that things will always get worse (or always get better).

“Other than in extreme circumstances, it is generally unwise to forget that there has always been and will always a be a cycle, whereby the economy does better or does worse for a while, and it seems premature to write off Next as a broken company, even if there is the nagging doubt that UK consumers have reached ‘peak stuff’ and are stopping buying things they don’t actually need with money that they don’t have (or have to borrow).

“Two things could make a big difference to Next’s fortunes, even in the very near term.

“The first is a cold snap. That would help the company shift its stock of winter warmers without having to discount its way out of trouble.

“The second is a rising pound – that would lower its import costs and also dampen wider inflation, to the potential benefit of consumer spending. History suggests that the stock has tended to do best when the pound is rising and worst when the pound is falling, so this makes Thursday’s Bank of England interest rate decision particularly interesting as aggressive talk from Governor Carney could give sterling a lift.”

Source: Thomson Reuters Datastream

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