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Should You Buy NEXT plc After Today’s Profit Warning?

NextNEXT (LSE: NXT) has been a great retail success story of the past 30 years. The fashion and home furnishings chain has continued to motor, even while some of the mightiest retailers — I’m thinking of Tesco — have stalled.

However, following an unscheduled trading update this morning, NEXT’s shares have opened at 6,555p — 5% down on last night’s closing price of 6,865p.

The fall in the shares won’t be welcomed by existing shareholders, but is this an opportunity for new investors to buy into the company?

Trading update

NEXT told us this morning that, while the company had enjoyed several “very strong” weeks of sales during August, “warmer weather in the more important month of September has had the reverse effect. The overall effect is that Quarter Three sales to date are up 6%, which is lower than our previous forecast of +10%”.

Nevertheless, the company said that, at present, full-year profit forecasts remain within the range of management’s previous guidance. The statement also noted that past experience suggests some lost sales are regained when the weather turns.

But, there was a warning:

“However, if this unusually warm weather continues for the full duration of October then we are likely to lower our full year profit guidance range of £775m to £815m”.

Takeaways

Things don’t appear to me to be as bad as the market’s initial reaction to the news suggests:

  • Sales are still up 6% in the quarter to date, which is growth some companies would kill for
  • NEXT may still hit its previous full-year profit guidance, which would produce stonking earnings-per-share (EPS) growth of 13%-19% (even with a warm October we could still see high single digits EPS growth)
  • Management can’t control the weather — it’s not like the company has blundered operationally or on adding up its numbers (yes, I’m thinking of Tesco again!)

The third point is particularly important for the investment case, because NEXT’s fantastic management team is one of its biggest strengths; you wouldn’t want to see management losing the plot.

Is this a buying opportunity?

If you trust NEXT’s management, which I do in spades, this does look like a decent buying opportunity.

Management has a policy of buying back the company’s shares — not willy-nilly, but only if it considers the level of earnings enhancement is as good as the return of an alternative investment.

As things currently stand, based on mid-point profit guidance of £795m for the year, 6,600p represents the upper limit company share buybacks. The limit will come down if profit guidance ends up being lowered, but I reckon today’s opening price of 6,555p looks pretty attractive.

Whether or not you share my views about NEXT, I'm sure you'll agree with me that financial freedom for life is something worth striving for.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.