Next plc’s (LON:NXT) have shares reversed yesterday’s gains as Deutsche Bank cut its target price to 4,750p from 4,900p and repeated a ‘hold’ rating after the fashion retailer reported its first annual profit decline in eight years.
Shares fell 2.71% to 4,085p at the midday mark.
The company yesterday said pre-tax profit fell 3.8% to £790.2mln in the year to the end of January, compared to £821.3mln the previous year, blaming a shift in consumer spending habits away from clothing purchases due to rising inflation. A weaker pound following last June's Brexit vote has pushed inflation higher, putting a squeeze on disposable incomes.
It marked the first drop in full year profit since fiscal year 2008 when businesses were still reeling from the financial crisis, though it was widely expected following a profit warning in January.
Revenue fell to £4.0bn from £4.2bn, driven by a 2.9% sales decline in its retail business. Brand sales were flat while sales in the online catalogue Next Directory arm rose 4.2%.
Shares jumped as much as 8% yesterday as investors shrugged off the slide in profit and sales, instead focusing on strong cash flows and the company’s strategy to turnaround the business.
Next generated an increase in surplus cash to £330mln from £300mln and rose discretionary cash flows to £717ln from £655mln.
Chief executive Simon Wolfson announced plans to invest £11mln to update Next Directory and said the retailer would introduce more of its best-selling easy-to-wear ‘heartland’ range. The new heartland products not are expected to filter through fully until September when the group releases its autumn rage.
“Having identified product opportunity gaps the hope is that sales trends will improve as the year progresses,” Deutsche Bank said.
“However, comparatives do not really soften substantially until the fourth quarter whilst inflation pressures on UK consumer spending only continue to build.”
Deutsche Bank said despite yesterday’s rally, shares are still down 15% in the year-to-date, having underperformed the wider sector by 6%.
The bank noted that a weak pound is likely to remain a pressure on margins until the second half of the next financial year.
“Additional detail on strategic plans for the year ahead may reassure but current trading does not and we cut our own pre-tax profit forecast and price target 3%.”
Next trades at a 16% discount to the wider sector and 26% to the UK market, Deustche Bank said, adding that risks include weaker UK consumer demand and market share losses to competitors such as online fashion retailers Asos and Boohoo.
There is also the danger of a more rapid decline in credit customers than Next expects.
Under Next Directory, the credit offer allows customers to buy items on credit and make repayments over a longer period. The credit customer base fell 3% in 2016 and the company expects a continued drop this year.
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.