The Next (LSE: NXT) share price is firmly lower this morning. That’s despite the retailer reporting what appears to be a solid set of numbers for the third quarter of its financial year. What’s going on?
Online sales rocket
Let’s start with the good stuff. Full-price sales were up 17% in the 13 weeks to 30 October, compared to the same period in 2019. This brings growth in the year-to-date to 11.2%, compared to the year that preceded the pandemic.
Personally, I find this comparison far more helpful in judging Next’s performance. With its multiple lockdowns and forced store closures, 2020 was just too much of an anomaly.
As you would expect, Next’s digital offer continues to see strong momentum relative to its retail stores. Total online sales in Q3 were up 40% versus 2019/20 while the latter fell by just over 6%.
This difference becomes even starker when sales figures for 2021-to-date are highlighted. With just three months to go before the end of Next’s financial year, online sales are already up 49.5% on 2019/20. By sharp contrast, retail sales have plummeted 28.8%.
If this doesn’t show just how popular shopping from the sofa has become (and how important it is for any retailer to get their digital offering right), I don’t know what will.
So why is the Next share price falling?
It seems to be down to the company’s cautious outlook. Today, Next said that it wasn’t expecting recent trading momentum to continue into Q4, even though sales in the last five weeks of Q3 rose 14%. This was a far better result than the 10% growth management had previously forecast.
In line with keeping its feet on the ground, the FTSE 100 constituent elected to keep guidance on full-price sales unchanged at 10.2% for November to January. It also raised guidance on full-year sales only very slightly. Pre-tax profit of £800m over the 12 months is still expected. That would be a 6.9% improvement on 2019/20.
Rather helpfully, Next provided a host of reasons to back up its projections. These include the possibility that demand will reduce now that people have already satisfied their post-lockdown spending desires. The inflationary environment — and the need for consumers to prioritise essential goods over discretionary spending — won’t help matters either.
Like many other businesses, Next also mentioned that stock availability “remains challenging” due to supply chain issues and labour shortages. Further investment in digital marketing is on the cards too.
This all looks very prudent to me. I’d far rather a company under-promise and over-deliver (which Next has a tendency of doing). As updates go then, I don’t think there’s anything new for holders to worry about. The question is, are the shares good value?
Up 40% over the last 12 months, Next stock now trades on 16 times earnings. That doesn’t feel excessive, in my opinion. Then again, I suspect the reasons cited in today’s statement make it more important than ever to ensure that I am properly diversified if I were to begin building a position today.
I’d also need to be confident that the company can hold its own in the run-up to the festive period if the share price isn’t to lose steam early in 2022.
Considering the headwinds it has faced lately, Next continues to impress. As retailers go, I suspect there are far worse options out there. It’s a cautious ‘buy’, in my book.
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