Next growth slows despite weather boost

Trading at Next slowed more than expected in the second quarter as the high street clothing group's online and overseas sales offset a persistent decline from its stores.

For the 26 weeks to 28 July, full price sales rose 4.5% with online sales growing 15.5% and retail sales down 5.3%. Including markdown sales, total sales in the first half being up 3.9% on last year.

Concentrating on full price store sales, the decline of 5.9% in the second quarter was slightly worse than feared after a fall of 4.8% in the first, while online sales growth slowed to 12.5% from 18.1%.

Overall this meant full price sales were up just 2.8% for the second quarter, down from 6.0% in the first.

Management said the second quarter was "ahead of our guidance" but was slightly below the 2.9% consensus forecast compiled by Bloomberg.

The company said it believed the performance in the quarter benefitted from the summer heatwave, "which greatly assisted the sales of summer-weight product" but warned that this was likely to take away sales from the remaining summer months.

Or as Next put it: "It is almost certain that some of these sales have been pulled forward from August, so we are maintaining our sales and profit guidance for the year to January 2019."

The end-of-season sale began on 7 July, one week earlier than last year, as planned, with around 20% less stock than last year. "Clearance rates to date are better than expected and have added approximately £4m to profit, however, this has largely been offset by higher warehouse and distribution costs."

Full year guidance was maintained, for profits to fall around 1.3% to roughly £717m, but earnings per share to rise 3.7% thanks to share buybacks.

Next's shares tumbled more than 7% on Wednesday morning to 5,492p, their lowest since mid-May.

House broker UBS had predicted a 2.8% rise in full-price sales and said the beat from strong full price selling of summer clothing meant clearance rates were lower than anticipated and some sales are likely to have been pulled forward from the third quarter.

"There should be more self-help from upcoming developments such as the new three-step credit offer," analysts said, retaining their full-year, full-price sales forecast of +2.4% and PBT of £725m as they foresee other new projects such as better search engine functionality and more personalisation helping online sales, as well as benefits from exits of rival from the sector.

"Next is starting to experience a similar trend to some online apparel retailers, with Unlimited [credit account] customers ordering smaller baskets, transacting more frequently and returning more... House of Fraser's CVA could also provide some benefit to Next via additional brands joining Label as opportunities to sell as third party brands in physical stores reduce."

Analysts at Stifel believe momentum has "pushed the share price ahead of fundamentals", though the quarterly numbers were seen as pretty much in line with consensus, with retail sales the weakness as they fall short of a consensus estimate for a 5.3% slide.

"Brand sales growth of 2.8% despite near perfect trading conditions highlights the growth challenges facing the group. The nearly 14x multiple (20% premium to peers) is undeserved and we reiterate our Sell rating".

The critical consideration, said Jefferies, is the company "remaining of the view that its very strong H1 market share outperformance was dictated by the normalisation process of past errors, rather than more fundamental changes in its UK brand appeal. A continued switch in mix in favour of Directory sales from retail is margin and FC accretive (we sense no major concern on the credit book despite a slight uptick in defaults)"

Jefferies said it was typically the case that relative market share momentum dictates the valuation context, which should be considered in light of a healthy valuation support stemming from free cash yield in excess of 6% for calendar-2018 expanding above 7% by 2019.

"Whether a contraction in trading space in the UK fashion industry could result in a more balanced demand/supply balance in the upcoming Autumn/Winter season will be the likely critical question over the balance of the year."

Mike van Dulken, head of research at Accendo Markets, said a slower Q2 than Q1 was expected, except that growth missed consensus as the declining bricks and mortar retail still remains the dominant sales channel.

The bringing forward of many August purchases implies Q3 could see another sequential slowing of growth into the key Autumn/Winter season. "Furthermore, weekly sales patterns have been volatile and growth distorted by end-of-season sales (a weak earlier than usual), making it difficult to identify an underlying sales trend. Not great messages, clearly preventing the company from turning more bullish for the year," he said.