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Next shares jump as investors shrug off annual profit decline and note robust cash flows

Last updated: 10:00 23 Mar 2017 GMT, First published: 07:31 23 Mar 2017 GMT

Next
Next said its been a challenging year for the retailer

Clothing retailer Next plc (LON:NXT) reported its first decline in annual profits for eight years and said it expects another tough year ahead as consumer spending habits shifts due to rising inflation.

But shares jumped 6.33% to 4,135.0p in morning trading as investors focused on its robust cash flows and plans to invest in its online catalogue business Next Directory.

Pre-tax profit fell 3.8% to £790.2mln in the year to the end of January, compared to £821.3mln the previous year. But it came as no surprise to the market after the company cut its profit guidance in January to £792mln from a previous estimate of between £$785mln and £825mln.

WATCH: Richard Hunter sees an "inflection point" for Next ...

“Not a pretty set of figures from Next but no worse than expected after warning on profits in January. Following that dire Christmas trading update investors were prepared for this and the retailer remains extremely cautious about the year ahead," said Neil Wilson, senior market analyst at ETX Capital, adding that investors seem to be "reassured that it’s taking steps to turn things around with a focus on core products."

Revenue fell to £4.0bn from £4.2bn, driven by a 2.9% sales decline in its retail business, which includes 538 stores. Brand sales were flat while sales in the online catalogue Next Directory arm rose 4.2%.

Next said consumer spending preferences have changed as a weaker pound following last June’s Brexit vote has pushed inflation higher. The company pointed to the Barclaycard consumer spending report for the fourth quarter of 2016, which showed a 0.3% decline in high street clothing sales, compared to a 11% increase at restaurants and a 8% rise in entertainment spend.

“The clothing sector faces three potential threats: a sectorial shift away from spending on clothing, price inflation as a result of Sterling’s devaluation and potentially weaker growth in real incomes in the wider economy,” Next said.

The group left its ordinary dividend per share at 158.0p as Next generated an increase in surplus cash to £330mln from £300mln and rose discretionary cash flows to £717ln from £655mln. 

Net debt increased by £11mln to £861mln as the company spent £161mln on new stores, warehousing and systems.

Chairman John Barton, who is stepping down in August and will be succeeded by Michael Roney, said it had been a “challenging” year for Next.

The drop in full year profit was the first since fiscal year 2008 when businesses were still reeling from the financial crisis.

Barton said while profits fell and its share price halved at the time, the group recovered strongly in the following years. He expects history to repeat itself.

“Trading conditions in the year ahead will continue to be tough, however I believe that by focusing on our core strengths, as we did during 2008, we will see Next emerge from this period stronger than before.”

Next has said it is expecting another fall in profits to a range of £680mln to £780mln this year and has guided to sales of between a 4.5% drop to a 1.5% increase.

Difficult year but brand not broken...

Cantor Fitzgerald said: "Next has an impressive track record and generates significant free cash flow, which enables it to buy back shares and pay special dividends. However, Directory growth is slowing while initiatives, including the (branded business) UK label, are undergoing a period of consolidation, overseas development appears to have slowed and the online competitive environment is more challenging."

However, Cantor said the brand is "not broken" even if it has lost business to mainstream competitors and reiterated a 'hold' rating and target price of 4,600p.

Richard Hunter, head of research at Wilson King Investment Management noted that “focused efforts to revitalise the Directory brand are being made, whilst the company’s ability to contain costs, ensure stock availability and invest in the business (such as new store openings), remains in evidence”.

“In addition, the dividend yield of over 4% is a reason for investors to wait, whilst confirmation of further special dividends adds to the immediate shareholder return.”

Next plans to increase investment in Directory systems and content by £11mln. It will roll out ‘Next Unlimited’, which allows customers to pay £20 for a year’s unlimited next-day delivery in the UK and Northern Ireland.

The retailer will also develop new credit offers, improve its search engine functionality and launch an overseas mobile website in August.

Meanwhile, Shore Capital analyst George Mensah noted the trend towards Directory customers gravitating towards cash accounts and away from the credit offer, which allows customers to buy items on credit and make repayments over a longer period. The credit customer base fell 3% during the period.

The Directory business has been relying heavily on the credit book and while it posted a 4.3% increase in sales, it marked a slowdown from the 7.7% growth in the previous year. Next expects the credit customer base to continue to decline at a modest rate in the year ahead.

"We reiterate our 'sell' stance as we feel the legacy impact of the Next retail division and wider consumer pressures will not be sufficiently offset by the growth trajectory of the Directory business," said 

--- Adds share price reaction, broker comment -- 

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