Next maintains top-line growth in a difficult retailing environment, but management have bought back too many shares.
The high street is suffering. Retailer after retailer is struggling to maintain profits; Britain's over-indebted consumers just don't seem to be able to spend any more. Some retailers are doing better than others, however.
French Connection
(LSE: FCCN)
is typical of the one that is doing worse. On Tuesday, it said its turnover was down 6% while margins decreased.
French Connection has additional problems, which are illustrative of the problems faced when investing in retailing stocks - so much depends on the judgement of the corporate buyers. These must get the selections right season after season. But French Connection's entire strategy depended on a joke. The joke has now gone stale and it's taking the "French Connection" brand with it. How many T-shirts can you buy with 'Guaranteed FCUK' emblazoned on them? Especially when you can't wear them when you visit your gran.
Next
(LSE: NXT)
, though, is doing rather better and has a good brand. None the less, it is also suffering from the tough retailing environment. Results released on Wednesday show like-for-like sales down 6.6%. Next says price reductions during its summer sale should have been larger and the sale should have started earlier. This could mean margins would have to be squeezed more. It also implies that Next may have trouble getting rid of stock.
Despite the weak retail climate Next has kept its top-line turnover rising by increasing floor space and opening more stores. This meant total turnover was up 8.1% and earnings 11.3%. Since January, the number of stores has increased from 439 to 457 and square footage from 4,309,000 to 4,539,000. Capital expenditure was £70.8 million in the six months. Next expects return on that investment in 17 months.
None the less, the outlook isn't too good. Next is budgeting a contraction of 2% to 5% in this coming year. But Internet and catalogue sales will be up by 7% or 9%.
A worrying sign is Next's share buybacks. If a company has excess cash, then share buy-backs are a good way of giving some of it back to shareholders. Next, however, appears to have overdone it. In January 2006 shareholders' equity stood at £256 million. By June, this had turned into a deficit of £95 million. The £396 million worth of buy-backs (including £113 million worth of contingent buy-backs) is the cause.
As a consequence of this buy-back mania, net debt has ballooned from £363 million to £660 million. This has been financed by a bank loan.
Next seems to be a well-run company with a knack for getting the fashion mix right season after season. Its prospective 2007 price-earnings ratio is 13.6. Its EV/ 2007 EBITDA is 8. This is neither massively under nor over priced. As a cautious investor, though, I'm wary what they've done with the balance sheet without, it seems, much reason. It's not one for me at the moment.
