Next´s trading update cheers up fashion stocks

Friday, 03 January 2014
ANALYSIS_ Next has given a boost to the market in general and to its fashion traded peers in particular after issuing an optimistic trading update. The stock opened almost eight percent higher Friday after Britain’s second-largest clothing retailer raised its full-year forecast  after sales in the fourth quarter “significantly” exceeded expectations.

“A strong fourth quarter has meant that sales are now ahead of the top end of our previous guidance. As a result we are raising our profit forecast range, which is now 684 million pounds to 700 million,” explained the company in a statement released Friday.

“During the year we have purchased and cancelled 6.2 million Next shares, at a total cost of 296 million pounds. The combination of profit growth, share buybacks and a lower corporation tax rate should result in growth in underlying EPS of between 21 percent and 24 percent,” the retailer added, setting the path for a strong year.

Positive outlook and “consistency” boost Next

Bryan Roberts, an analyst at Kantar Retail explained in an interview with Bloomberg TV that “Next is an absolute masterclass in being consistent,” adding that is precisely this consistency what attracts investors. “What they have done is train their shoppers to know precisely what to expect, which is affordable, decent, mid-range fashionable clothing, which is really good quality. More importantly, they’ve trained shoppers to expect absolutely no discounting whatsoever in the run-up to Christmas,” Roberts concluded.

Next has raised its pretax profit guidance for the full year – to end in January – to be between 684 and 700 million pounds, ahead of last October´s update which set the pretax profit to be somewhere between 650 and 680 million pounds.

On the wake of the news, the retailer´s shares rose as much as 11 percent, the biggest gain in almost five years, as per Bloomberg´s records. The positive news also lifted other FTSE 100 stocks, specially cheering other fashion peers such as Primark´s owner AB Foods or Marks & Spencer.

Research analysts at Deustche Bank have reiterated their ‘hold’ recommendation on Next Plc (LON:NXT)‘s stock in a report released on Friday. They currently have a 5,900 pence target price on the stock, which suggests a potential upside of 6.69 percent on the the stock’s last close.

In December, analysts at Cantor Fitzgerald reiterated the same ‘hold’ rating on the shares, setting their target price at a lower than Deustche Bank´s 5,200 pence.

“The step-up in Christmas trade was mainly down to improvements in our seasonal knitwear, nightwear and gift offer. In addition, increased confidence in online deliveries meant that more customers continued to trade with Next Directory right up to the weekend before Christmas. It is therefore very unlikely that the strength shown in this quarter will continue through the first half of the new financial year, and of course this year’s success will present difficult comparative numbers in the fourth quarter next year,” summarised in the statement Lord Wolfson, Chief Executive at Next.

Now, budgets for the year ahead are based on growth in Next Brand sales of between 3 percent and 7 percent, and expect profit before tax to be up broadly in line with sales. Additionally, Next expects to generate and return a further 300 million pounds of surplus cash. The company revealed as well that it will pay a special dividend of 50 pence a share at a cost of 75 million pounds.

"During the year we have purchased and cancelled 6.2 million Next shares, at a total cost of 296 million pounds. The combination of profit growth, share buybacks and a lower corporation tax rate should result in growth in underlying EPS (earnings per share) of between 21 percent and 24 percent," the company said.

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