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Next rallies, but there's still work to do

Shares in the high street chain bounced once it became clear costs have been well-managed
March 23, 2017

The market knew these results from high-street chain Next (NXT) weren’t going to be pretty, so the shares' relief rally may not come as a surprise. But why did its stock bounce so dramatically on these fairly dire numbers? Full price sales are still falling, and it’s only thanks to Next Directory and the popularity of online shopping that total group sales stayed pretty flat at £4.1bn. But the other side of the coin is costs and, in this respect, Next fared quite well.

IC TIP: Hold at 4140p

Total cost increases - the result of higher wages, rent inflation, marketing and software and systems investments - came to £41m. But cost savings, made by cutting back on staff incentives, clawing back efficiencies in the supply chain and increasing productivity, came in at £42m. Include net interest income, and these cost savings rose to £64m. This meant a 4 per cent decline in underlying pre-tax profits to £790m was in line with management’s last guidance and consensus forecasts. This year, costs should rise by around £36m, led by wage inflation and higher taxes, although the group says it’s already identified £26m-worth of savings to help mitigate the effect.

Operationally speaking, the group also wants to move back towards “heartland” products, described as best-selling items that are easy to wear and can be delivered in large volumes at competitive prices. Changes made to buying practices late last year meant this kind of product was sacrificed to allow for more trend-driven options. “Corrective action” on this front has already started and should be reflected in the summer product range, available to buy from May.

But the year to January 2018 won’t be easy, so there are a host of items on the agenda to help the business turn its fortunes around. They include upgrading the website functionality and credit offers for Next Directory, investing in overseas mobile applications and opening retail locations where profitable.

Analysts at Peel Hunt expect adjusted pre-tax profits of £722m for the year ending January 2018 (FY2017: £790m), giving EPS of 412p.

NEXT (NXT)

ORD PRICE:4,140pMARKET VALUE:£ 6.09bn
TOUCH:4,137-4,141p12-MONTH HIGH:6,725pLOW: 3,550p
DIVIDEND YIELD*:3.8%PE RATIO:9
NET ASSET VALUE:347pNET DEBT:169%

Year to 28 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20133.56667320105
20143.74695366129
20154.00795428150
20164.18836451158
20174.10790441158
% change-2-5-2-

Ex-div: 6 Jul

Payment: 1 Aug

*Not including special dividends. See text