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Cash-generative clothing seller has strengths to cope with mounting challenges

Hard-pressed clothing and homeware retailer Next’s (NXT) full year results (23 Mar) revealed a first profit decline in eight years. Yet a big sell-off in the shares presents a buying opportunity, in our view.

No surprise following a post-Christmas profit warning, results for the year to January 2017 revealed a 3.8% decline in pre-tax profit to £790.2m. On the plus side CEO Simon Wolfson maintained his year to January 2018 profit before tax guidance range at £680m-£780m.

Results revealed a further sales decline for the core Next Retail business, with online and catalogue arm NEXT Directory remaining the key sales driver. Its sales were up 4.2% with customers continuing to shop more online. More negatively, Directory’s credit customer base continued to decline, albeit at a slower rate.

Larger comp NEXT

Back to basics

Next is now refocusing on core essential ranges. It has previously been hurt by the omission of some ‘best-selling, heartland product’. We have faith in management’s ability to unlock online potential.

‘Extremely cautious’ about the outlook, it is worth nothing that management are concerned by a shift away from spending on clothing towards leisure, price inflation due to sterling devaluation and anaemic growth in real incomes.

Cash in the coffers

These pressures will hurt weaker rivals too and Next is fortunate to be in a strong financial position. Though total dividends are unchanged at 158p, it plans to also pay four quarterly special dividends of 45p each. Share buybacks are on hold until trading improves.

Rather ominously, Wolfson concedes it is ‘legitimate to question the long term viability of retail stores and whether the possession of a retail portfolio is an asset or a liability’.

Reassuringly, the retail grandee believes ‘our stores represent a valuable asset and will continue to do so’. In the unlikely event that like-for-like retail sales continue to decline rapidly over the coming decade, the CEO reckons ‘our lease structure is such that the portfolio could be managed down profitably.’


We’re staying positive on Next, which could prove a retail safe haven due to its superb cash generation and best-in-class management team. At £41.48, a bumper 8.1% yield underpins the battered share price. (JC)

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