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Next shares jump on well-received Christmas trading update

In 2019, Next expects full price sales growth of 1.7% but estimates profit will fall 1%

Next intends to return surplus cash to shareholders through buybacks in 2019

Next PLC (LON:NXT) cut its full-year profit guidance but shares gained as the fashion retailer defied a high street downturn to deliver sales growth over the key Christmas trading period. 

In a trading update covering October 28 to December 29, the fashion retailer said profits were dragged lower by the fact sales were dominated by lower-margin seasonal goods as well as operational costs related to online sales

Next now expect full-year profit of £723mln, which is 0.6% lower than its previous forecast of £727mln.

Sales rise in line with expectations 

For the Christmas trading period, the company reported a 1.5% increase in total full price sales, including finance interest income from its Next Pay credit division.

Full price sales of products gained 1.0% with online sales up 15.2% and retail sales down 9.2%. The firm said total full price sales were in line with our expectations, online sales were 2.2% ahead of its estimates and retail sales were 1.7% below.

READ: Next shares slip as sales at retail stores fall further in third quarter

Stock in the group’s end of season sale, including the items put into Black Friday, was 3% higher on last year. Next said clearance rates were broadly in line with its expectations and were consistent with the profit guidance given in September.

Next estimates dip in 2019 profit 

In 2019, the company expects full price sales growth of 1.7% with retail sales down 8.5% and online sales up 11%. Based on this estimate, Next predicts profit of £715mln, down 1% on the number expected for this year.  

Given the uncertainty surrounding the UK’s withdrawal from the European Union, the group said its estimates have not taken into account the impact of a possible disorderly Brexit or the benefits of a smooth transition.

“This year uncertainty around the performance of the UK economy after Brexit makes forecasting particularly difficult,” Next said.

More positively, Next expects surplus cash generation of £300mln and intends to return this to shareholders through share buybacks.

Analysts view trading update as strong given high street downturn 

Shore Capital said Next's trading performance was good considering the pressure retailers are under from subdued consumer spending and online competition. 

"Given the macroeconomic environment and difficult clothing market through the Autumn, management should be applauded for such a credible trading update," the broker said.

However, ShoreCap repeated a 'hold' rating on the stock, noting that consumer sentiment is at its lowest for five years over "Brexit fatigue". 

"Like the company, we believe that we need to get through calendar Q1 and understand the political and economic backdrop of any potential Brexit deal."

Shares rose 5.7% to 4,418p in morning trading. 

Investors have been bracing themselves for poor Christmas trading updates from retailers after a shock profit warning from ASOS plc (LON:ASC) last month.

READ: ASOS shares slump on profit warning as it succumbs to challenging retail market

The online retailer said it had seen weak trading in November, a key month for the group as it includes Black Friday sales.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said Next has delivered some Christmas cheer to the retail sector, but only because its online offering is doing so well.

Numbers from the high street stores look pretty dire, and tellingly Next expects sliding sales to continue for the next year.

"Next has a reputation for under-promising and over-delivering, but even if its forecast of an 8.5% decline in retail sales in the next year is a bit wide of the mark, it still paints a pretty bleak picture of the future for high street retail," he said. 

Quick facts: Next PLC

Price: 6254 GBX

Market: LSE
Market Cap: £8.31 billion

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