As the markets recover from their holiday slumber and consider what a new decade could bring, at least something in the corporate world has remained a constant: a solid set of numbers from clothing retail behemoth Next (NXT). Its 'sales to 28 December 2019' update observed fourth quarter sales up 5.2%, which was usefully 1.1% points ahead of its internal forecast. This in turn allowed full year profit guidance to be upped by - wait for it - £2 million to £727 million, implying a 0.6% year-on-year increase. This equated to 5.4% year-on-year estimated earnings per share growth due to the good ship buybacks having an additional statistical inflationary impact. And the good news for shareholders and analyst types who like to fiddle with their forecasts does not stop there!...
The company also notes that 'looking ahead, initial guidance for the year ending January 2021 is for full price sales to be up +3%, profit up 1%, EPS growth of +3.5%'. A retailer giving guidance a year ahead...Next really is something else. Digging into the numbers however, clearly whilst everything is positive and moving in the right direction, I would suggest it is hardly cigar time. I am not going to make a cheap comment about the weather helping out (although certainly the cooler November versus a year ago aided sales!). Additionally, to have any positive traction in a clothing retail market where it has been far, far easier to spot the shockers than the diamonds deserves a tip of the hat. But take out those buyback effects and profit is only up a touch and - as for that January 2021 guidance - the company also notes that 'next year will be a 53 week year...we expect the additional week of sales to generate approximately £13m of profit'.
Maybe I am being churlish here, especially when the company notes that its intention 'is to return surplus cash (of around £300 million – equivalent to just under 3% of market cap i.e. a nice supplement to the 2%+ dividend yield) to shareholders through share buybacks or special dividends', the former which will be capped at 7176p, a few percent above the current share price. However, whilst Next is a machine, it is also a massive consensus buy. If you believe in UK retail recovery, you can certainly find more leverage almost anywhere else. And if you want to be defensive, then paying a teens earnings multiple for little underlying growth (but a cashflow stream I admit) here does not sound like epic risk-reward.
My thoughts? Below £60 a share I would have another look (and I will comment further), but at around £70 a share I am going to leave it to the clothing experts – even if Next itself is telling you it sees buyback value up to a handful of percent above the current share price. And the small down share price reaction kind of implies a lot is priced in.
Filed under: Next plc, Neill Ricketts, Versarien, Canaccord, Bearcast, Itaconix, Sirius Minerals
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