Next smashes expectations and Royal Mail hit by parcels volume decline

“Yesterday’s market rebound was welcome, but also raised questions as to whether it was a dead cat bounce. The fact markets have sustained positive momentum for a second day in a row is more encouraging,” says Russ Mould, Investment Director at AJ Bell.

“Helping to focus investors’ minds on stock opportunities and divert attention away from general worries about the economy and inflation is a step-up in companies reporting their latest earnings.

“There was also a sense that investors were regaining their appetite for higher risk stocks, with notable gains among airlines, transport operators and leisure companies including Cineworld up nearly 8%, Trainline advancing 5.7% and EasyJet up 3.6%

“The FTSE 100 advanced 0.9% to 6,942, with retail and leisure the standout sectors helping to drive the index. Providing support were pharmaceutical and consumer goods stocks.

“Across the FTSE 350, Next surprised the market with better than expected figures, so did media group Future which anticipates its full year profitability to be materially ahead of current market forecasts.

“Perhaps investors needed these nuggets of good news to help lift sentiment.

“The Euro Stoxx 50 was also upbeat, advancing 0.8% with chip making equipment specialist ASML riding high from a very strong set of quarterly results. Margins were better than expected and it also unveiled plans to buy back up to €9 billion of its shares by the end of 2023.”

Next

“Consumers have had the need and means by which to go on a spending spree, and that’s created a tailwind for Next. The retailer has a habit of beating expectations and its latest update is true to form.

“It seems that consumers have been playing catch-up when it comes to shopping for summer clothes, having not bothered much during the pandemic’s various lockdowns.

“A lot of people have also had the money to make purchases, dipping into the cash saved from not going out or paying for transport to work for more than a year. What’s interesting is how Next’s physical store sales have ‘only’ seen a 6% dip in its second quarter to 17 July versus 2019. That is a positive result in the context of physical retail trends and Next is likely to have benefited from the sunny period enticing people out of the house.

“Hot weather during the May half-term encouraged people to go outside and enjoy leisure and retail pursuits. While Next says the latter part of June wasn’t as good for sales growth when the weather took a turn for the worse, that does resonate with ASOS also blaming less favourable weather for its own sales blip.

“We’ve heard from many retailers in recent years how business is shifting online, and the high street or retail park stores are becoming a sideshow. Next is managing to keep its stores more relevant by using them for a combination of click and collect, customer services and as a showcase for products.

“Before the pandemic, Next’s online customers collected nearly half of their orders from stores and more than 80% of returns went back to a physical store rather than in the post. To make sure staff are kept busy, Next is now experimenting with store staff handling some work that would normally go through a contact centre. That’s a clever move and keeps the business running efficiently.

“Next is giving customers a reason to keep visiting its stores and in doing so it has an opportunity to try and sell them more items. Once the summer period is over, one might expect Next to try and push more formalwear in anticipation of more people returning to the office to work, either on a full or part-time basis.”

Royal Mail

“Parcels came to Royal Mail’s rescue last year, helping to revive a stock beaten down by poor delivery on the part of management, industrial disputes and inefficiency since its privatisation back in 2013.

“The strong performance, as more of us were stuck at home ordering in products rather than going to the shop to buy them, helped restore the shares to a place in the FTSE 100.

“However, the reopening of the economy has seen a material year-on-year decline in parcel volumes as always seemed likely.

“That doesn’t mean the acceleration in e-commerce is going away any time soon and this remains a positive driver for the group, particular in its GLS logistics unit, and when compared with 2019, parcel volumes are still significantly higher.

“It’s also notable that profitability on the parcels side is up year-on-year, suggesting the company is effectively being rewarded for how it performed in the initial phase of the pandemic.

“However, it is less positive that Royal Mail is not providing full year guidance for its UK arm and a short-term boost for letter volumes as businesses gear up again is unlikely to be sustained. This remains a part of the business which is in structural decline.

“Royal Mail also faces changes in modernising its processes and balancing a need to make the business as efficient as possible while not alienating staff which have served with loyalty and distinction through the coronavirus crisis.

“The so-called ‘pingdemic’ is a short-term headache too, with postal services affected as thousands of workers are forced into isolation.”

These articles are for information purposes only and are not a personal recommendation or advice.