Next store sales keep falling as 'volatile' trends cloud outlook

Next continued to face declines in full price sales from its shops and week-to-week volatility in the third quarter but thanks to strong online and catalogue growth the clothing retailer stalked on towards its full year targets.

Full price sales in the third quarter were up 1.3% on last year and so Next brand sales in the nine months of the year to 29 October are down 0.3%, while total sales were up 0.8% and down 1.2% in the year to date as clearance rate remained down.

Chief executive Simon Wolfson admitted week-to-week sales volatility was making it "very hard to determine any underlying sales trend", so could only modestly tighten his full year guidance.

Even up against the weakest quarter of last year and with management believing that product ranges have "continued to improve", full price sales in the retail division fell 7.7% in the quarter and so for the year to date were also down 7.7%, while while Directory sales jumped 13.2% in the quarter to lift year-to-date growth to 9.4%.

Clearance rates mid-season sale and generally remained lower than last year, a trend that began in the summer end-of-season sale.

A weekly chart of sales performance showed the volatility week-on-week across the quarter, with eight positive weeks of growth during August and early September, followed by sales below last year for the final five weeks, which was likely to reflect the milder weather.

New full year guidance was for full price sales of between -1.75% and +1.25%, profit before tax of £692m and £742m, which will represent a fall of between 12.4% and 6.1% and will see earnings per share fall between 10% and 3.5%.

Full year guidance implied fourth-quarter sales will be down 0.3%, which Next acknowledged "may seem pessimistic", particularly with product ranges improving, but was eyeing last year's Christmas trading period as a much more demanding comparative than the third quarter, not to mention the volatile sales trends.

A consistent silver lining throughout a difficult year for Next has been the group's strong cash generation, with a fourth special dividend of 45p per share declared, as expected.

It will be paid on 25 January and the board intends to return a final £25m of surplus operating cashflow through share buybacks before the end of the financial year, subject to market conditions.

INVESTORS AND ANALYSTS DISAPPOINTED

Next shares, having earlier in the week gained 37% from July's five-year lows, plunged almost 8% in early trading on Wednesday.

Independent retail analyst Nick Bubb felt the 7.7% fall retail sales was "sickening" and the overall outcome was "disappointing" in light of some predictions in the City for full-price sales to be nearly 4.5% up in the quarter, driven by Next Directory.

Analyst Neil Wilson at ETX Capital was not impressed in the update, saying the company “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."

He said sales volatility preventing accurate forecasting was "most worrying" and "poses significant problems for investors", and suggested the guidance of a fall of 0.3% "could be well wide of this mark".

But cash generation was a reassuring constant for the group for Wilson. "As ever when talking about Next’s problems in growing sales amid a tough retail market, the business remains strongly cash generative even if it’s not expanding rapidly and is able to maintain solid returns to investors.”

Clive Black at Shore Capital said the update implied store like-for-like sales were down 8.9%, though overall Next brand sales made "a step-up in overall performance".

He said the sales volatility was a similar sales trend seen from the John Lewis weekly sales figures and has read-across for the rest of the high street.

"It remains all to play for in the run-up to peak trading," Black said.

George Salmon at Hargreaves Lansdown said the share price reaction showed how cruel the stock market can be.

"Next’s third quarter performance is actually better than what we’ve seen from the group so far this year, but with many expecting a much stronger showing, the shares still took a tumble," he said, with the particularly weak October meaning the group enters the all-important Christmas period with less momentum than it would have liked.