Mild weather and a Brexit-induced weakness in consumer confidence are bound to have affected Next PLC’s (LON:NXT) Christmas trading performance, Jefferies said.
In a note to investors, titled a “Messy Xmas”, Jefferies maintained a ‘hold’ rating on Next but cut its target price to 4,600p from 5,600p.
Next will be the first retailer to report its Christmas trading update on January 3.
Jefferies expects a 3% cut to the fashion retailer’s full year pre-tax profit guidance of £727mln, saying recent comments from peers and industry data confirmed the UK apparel market saw a solid October but a weak November.
ASOS PLC (LON:ASOS) issued a profit warning on Monday after a poor trading performance in November, a key month for the online fashion retailer.
The news dented investors’ hopes that Christmas sales would help retailers turn around its sales performance for the year.
READ: ASOS shares slump on profit warning as it succumbs to challenging retail market
Outlook depends on Brexit
"Whilst some big days of December trading are still ahead of us, we don't expect the protracted softness which spilled into December to be recovered," Jefferies said.
"Looking at the early months of 2019, much of the outlook continues to be dictated by what shape the Brexit discourse will take."
The first quarter of 2019 will be compared to last year’s weak performance when the so-called ‘Beast from the East’ meant customers stayed indoors during icy temperatures and heavy snowfall.RE
READ: Next shares slip as sales at retail stores fall further in third quarter
Jefferies said this makes for “good chances” of a solid transition into spring and summer clothing ranges.
“But whether UK consumers take full advantage of their improved ability to spend (with disposable income growth currently at more than 3%) will depend on politicians steering the Brexit process through calmer waters (the w/c 14 January parliamentary vote being the next big step),” the broker said.
Jefferies cuts profit forecast for Next
Against a tough retail backdrop, Jefferies estimates Next will report a 13% decline in like-for-like sales at its retail stores in the fourth quarter, compared to the 10.2% drop it previously expected. This is expected to be offset by growth in the Directory, Label and international businesses.
“We assume Xmas trading performance slightly softer than that in retail, with full price retail like-for-like -13.5% giving Brand sales of -2.9%.
“Combined with a slightly softer gross margin estimate (given no progress in mix in favour of full price sales in Q4) this sees us cut our full year pre-tax profit forecast from £726mln to £705mln (vs current guidance at £727mln).”
For the 2019/20 financial year, Jefferies expects pre-tax profit of £706mln, supported by full price brand growth of 3.1% (Retail like-for-like -4.7%, Directory +10%).
Jefferies said the recent sell-off has seen the shares de-rate to a FSTE discount of 20%, versus an historic range of -30% to 30%.
The broker currently prefers “more growthy” names like Primark owner Associated British Foods PLC (LON:ABF) and B&M European Value Retail (LON:BME), which have “experienced as extreme a reset in the valuation context”.