Next suffers due to cut-price projections

Next (NXT) revealed details of its half-year performance a day after Boohoo (BOO) cut its full-year sales outlook and cash margin expectations. Although the fast-fashion retailer pursues a somewhat different business model to that of Next, the recent experience of both companies points to a bleak near-term outlook for the rag trade.

It was no surprise that bosses at Next revealed that wider inflationary pressures have already had an impact on discretionary spending – and matters could be set to deteriorate. The share price pulled back markedly in response, albeit on a trading day when fiscal-linked volatility was holding sway. The company has pared back full-year pre-tax profit guidance to £840mn against an earlier estimate of £860mn. That’s hardly a disaster on the face of it, particularly given that the rejigged guidance is still in advance of the FY 2022 rate, although comparisons with outcomes over the last couple of years aren’t quite as meaningful as they would be without the impact of the pandemic.

Perhaps the main worry centres on discounting and its potential affect on profitability going forward. Full-price sales are now forecast to fall 1.5 per cent over the second half, against previous expectations of a 1 per cent increase. You imagine that vulnerabilities on this basis have increased due to a 44 per cent rise in inventories year on year, although again comparisons may well be skewed due to the pandemic. It’s essentially a balancing act, as the inherent value proposition of the brand helps to secure market share, but occasionally at the expense of profitability.

Management also revealed that factory gate dollar prices and logistics rates are beginning to ease, notwithstanding the recent trajectory of sterling. And it notes that “the devaluation of the pound against the dollar does not automatically translate into selling price increases”, as the company has hedged its currency requirements through spring and summer 2023.

But the immediate challenge faced by the retailer have been succinctly summarised as follows: “The devaluation of the pound looks set to prolong inflation, even once factory gate prices ease”.

Next also projects a softening in online sales as “clothing and homeware growth will slow, if not reverse”, yet it is also guiding for a net operating margin of around 16 per cent, and the generation of “significantly more cash" than it plans to invest in the business. Finance costs and the debt overhang remain a concern, although the latter is contracting and consensus forecasts point to a narrowing EV/Ebitda multiple.

The company has regularly under-promised and over-delivered, but household discretionary budgets haven’t been under so much pressure in decades. Hold.

Last IC View: Buy, 6,182p, 24 Mar 2022