Christmas may be coming, but clothing retailer Next Plc (LON:NXT) seems to have no idea what Santa will bring given the uncertain sentiment of the British shopper, spooking investors the day after Halloween.
In a trading update for the three months to 30 September, the fashion retailer again lifted its full year profit guidance and reported third quarter sales growth but warned that its performance has been “extremely volatile” and highly dependent on the weather.
Neil Wilson, senior market analyst at ETX Capital noted that a cooler August and September meant shoppers bought warmer clothes and sales were up significantly on last year.
He pointed out that industry-wide textile, clothing and footwear sales were up 7.2% in September, according to recent Office for National Statistics data, but October is looking a lot less impressive for Next with full price sales down in every week from last year.
The analyst said: “Most worrying, Next says sales volatility makes it ‘very hard to determine any underlying sales trend’. This poses significant problems for investors. As a benchmark it’s plumped for the full price sales for the year to date, which are down -0.3%. But it could be well wide of this mark.”
Simon Wolfson not known for being the most upbeat
Wilson pointed out that Next chief executive Simon Wolfson is not known for being the most upbeat and again the bar is being set pretty low.
But, he added: “Next better hope that British shoppers are a little less fickle than the weather, because sales performance is so volatile the firm has no idea what to expect over the vital Christmas trading period.
“This is a worry, although there does seem to an improving trend in sales growth throughout the year that may calm nervous investors.“
By midday, Next shares had plunged by over 8%, or 411p at 4,510p as investors took fright.
AJ Bell investment director, Russ Mould said: “The reaction looks a bit harsh to me. After all, the company is keeping the mid-point of its profit forecasts unchanged, is ticking to its plan to pay a fourth special dividend for the year and pressing ahead with its share buyback programme.“
He added: “What seems to have upset the market are the references to volatile trading, unhelpful weather and a forecast which implies sales in the fourth quarter and therefore the vital Christmas period, will be slightly down on where they were a year ago.”
Mould continued: “This does feed the bear case that Next has too many stores and faces too much online competition, meaning it could be a potential value trap for investors, in that it is a cheaply-valued company that could get cheaper, simply because earnings continue to disappoint, or even just fail to surprise on the upside.
“But there is always the chance that too much pessimism creeps in. Analysts are already forecasting three straight years of flat-to-down profits and only three of the 25 brokers who follow Next are buyers of the stock – by contrast, nine rate the shares as a ‘sell.’”
He concluded: “When times are tough there is a tendency to over-extrapolate from the present and assume that things will always get worse (or always get better).”
Bargain hunters seeing solace
Meanwhile Mike van Dulken, head of research at Accendo Markets, commented: “Bargain hunters are seeing solace in prior 4500p resistance serving as support thus far, potentially acting as a springboard for a bounce.
“They also note the freshly oversold daily RSI which was the case back in mid-July before UK retail data began to improve, ushering the shares into early August’s bullish Q2 trading update and September confirmation.”
But he added: ”Bears are looking for any hint of said support being in jeopardy, potentially putting the shares back in the 3600-4500p range they traded after Jan’s profits warning”.
And, the analyst asked: “Can things improve in Nov and Dec? Has guidance been cut to engineer a Christmas beat? Or are we headed for another warning in early Jan that sees the shares punished accordingly?”