There has been a lot of focus this week on the fall in the FTSE 100 index. This is newsworthy, given the size of the move lower earlier this week to well below 7,000 points. Among all of this are a few standout performers. One of them is Next (LSE:NXT). Despite the broader market issues, Next shares are up 8% today. With such a divergence from other stocks in the index, what’s going on here?
Positive trading update
The main news that’s providing the lift to the Next share price is a trading update just released. In it, the news focused on the past quarter. In a similar way to some other companies, it’s using the comparison from 2019 instead of a year-on-year measurement. This more accurately reflects performance given that 2020 was such an outlier.
There was a lot of positive news to be taken from the release. At a broad level, total online sales grew by 44%, with total product full price sales also up 20.8% for the 11 week quarter. Given that the previous guidance was only looking for a total overall increase by 3%, it’s easy to see why the Next share price jumped so much.
The positive results meant that Next has upgraded its full-year profit projection by £30m to £750m. Higher profits also mean higher cash flow. Surplus cash is expected at £240m, meaning that several dividends are due to be paid out over the rest of the financial year and beyond.
Is this just a short spike in the Next share price?
Although investors were clearly surprised by the results, it could be seen as a blip. After all, full-year 2020 results saw profit before tax drop by over 50% due to the impact of the pandemic.
In my opinion, I don’t think today’s news is just a good blip in performance for Next shares. The lockdown over the past year has meant many consumers have cut back on spending. With regards to clothing, I think a lot of people have adopted a make-do approach.
Yet now that we are seeing restrictions eased and life starting to get back to normal, people are feeling more confident in the state of the economy. I think this was particularly evident in this period within the trading update. As a result, higher discretionary spending is benefiting a fashion retailer like Next.
Looking forward, I personally think the UK economic recovery is still on track. Despite the FTSE 100 crash, I think the concern will be short-lived. On this basis, I think the Next share price has further legs to move higher throughout H2.
One risk I do note though is that being optimistic in reports early in the year can sometimes come back to bite firms. The good news of upgraded profit forecasts is now factored in to the share price. So any underperformance (or even just being in line with expectations) is unlikely to materially boost the shares. Any results that miss the upgraded figures could be seen as a negative, even though they are better than original expectations.
On balance, I would invest in Next shares currently but given that I have missed the move today, would only allocate a small amount.
