The popular retailer can't blame 'disappointing' store sales on snow last festive season.
This morning, well-known fashion chain Next (LSE: NXT) released a trading statement in which it admitted to 'disappointing' sales in its Next Retail stores.
What, Next?
Last May, I chose Next as my best buy on the high street for 2011. Hence, I'm somewhat concerned that even this FTSE 100 powerhouse is struggling with weak sales growth.
For the record, Next's overall sales (excluding VAT) climbed by 3.1% in the period from 1 August to Christmas Eve. For 2011 as a whole, sales growth was 3.2%.
However, sales at high-street stores actually fell by 2.7% over this period, and by 2.2% for 2011 as a whole. All the growth came from Next Directory, where sales grew by 16.9% between 1 August and 24 December, with 16% growth for 2011.
In other words, Next did very well online and by mail order, but its high-street sales were weaker than in 2010. As I write, Next shares are down 3% at 2,659p, valuing the group just short of £4.5 billion.
Positives and negatives
The good news is that Next did not discount its products in the run-up to Christmas and thus maintained its operating margins. Therefore, it still expects 2011/12 pre-tax profit to be £565 million, give or take £7 million, 4% ahead of the previous year. Thanks to enhanced cash generation and share buybacks, Lord Wolfson expects earnings per share to be 11.3% higher.
Last year, retailers were hit by snow and icy weather in November and December. Without this excuse to rely on, Next blames its weaker performance on 'competitor discounting' and 'longer lasting economic effects'. It even produced this compact table to summarise likely trends in 2012:
| Positives | Negatives |
|---|
| CPI inflation to drop closer to 2% target | Eurozone difficulties affecting confidence |
| Last year's VAT increase drops out of comparisons | Continuing credit squeeze |
| Stable selling prices, with zero like-for-like inflation | Higher UK unemployment |
A sign of worse to come?
Given that Next is one of the best-managed retailers in the country, its slight downturn in performance is likely to be magnified at weaker rivals. Hence, this morning saw a broad slide in the share prices of large retailers, including Marks & Spencer (LSE: MKS), down 2.5% to 310p in early trading.
Looking ahead, Next has this five-point plan to cope with the ongoing 'difficult consumer environment':
1. Setting realistic and conservative sales targets
2. Controlling costs
3. Opening profitable new space to achieve high returns on capital
4. Growing Next Directory in the UK and overseas
5. Boosting earnings per share through share buybacks.
Personally, I'm not a fan of share buybacks, so I'd prefer Next to return cash to shareholders via raised or special dividends. Nevertheless, the group intends to use surplus cash to purchase £200 million of its own shares during 2012, reducing its share base by around 4.5%.
Valuation
Right now, Next trades on a forecast price-earnings ratio of 11.5 and its shares carry a dividend yield of 3.2%, covered 2.7 times. These fundamentals are more demanding than when I reviewed Next in May 2010, when its share price was 2,322p.
Hence, while it remains my pick of the high street, Next is no longer a buy for me. With yet another year of challenging trading ahead, owning any retailer is just too risky for me!
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