Those hoping for a share price recovery at Next (LSE: NXT) in 2017 will be forced to reconsider their optimism following January’s horrific slump.
The clothing giant — which saw its stock value plummet 32% lower last year — also suffered a 22% drop during January, the firm taking in four-year lows in the process. And it is easy to see Next extending this weakness long into the future, certainly in my opinion.
Next’s latest collapse was prompted by shocking Christmas trading numbers released at the start of the month. The retailer advised that full price sales in the 54 days to December 24 had dropped 0.4% year-on-year.
While Next advised that revenues have picked up during the fourth quarter, it added that “we were expecting sales in the fourth quarter to grow on the previous year, as the comparative numbers in 2015 were poor.”
Next now anticipates that pre-tax period for the 12 months to January 2017 will drop 3.6% from the corresponding period, to £792m, marking yet another profit warning.
Big ticket bothers
But Next isn’t the only shopping stalwart to sink this month.
Indeed, electricals colossus Dixons Carphone (LSE: DC) has seen its share price scuttle 10% lower from December’s close despite releasing a mostly-bubbly trading update, and the stock is a fraction away from plumbing depths not seen since last July.
Sales at Dixons Carphone have held up pretty well since the EU referendum prompted fears of a cooldown in demand for big ticket items. And this was borne out in the retailer’s festive statement — like-for-like revenues in the core UK and Ireland division rose 6% during the 10 weeks to January 7.
Dixons Carphone noted that sales grew for the fifth successive year during the Christmas period. As a result the business affirmed expectations of a “meaningful uplift in year-on-year profitability” in the period to April 2017.
Worth a punt?
Investors have elected to head for the exits, however, since a predicted worsening sterling weakness as we move through 2017 — if realised — would heap huge strain on Dixons Carphone’s margins. Next also faces the same cost pressures, of course, with the business advising in late summer that it may have to hike prices of its items by 5% to mitigate currency pressures.
Such measures would go down like a lead balloon with consumers already grappling with shooting inflation. Indeed, the Resolution Foundation warned this week that the “mini-boom” in Britons’ living standards is set to come to an end thanks to rising inflation and poor wage growth.
And latest retail sales data from the Office of National Statistics have fanned expectations of gruesome trading conditions this year. The body announced that sales slumped 1.9% during December, the biggest drop for more than four-and-a-half years.
So while both Next and Dixons Carphone deal on low prospective P/E ratios of 9.4 times and 10.1 times, I reckon the prospect of a severe revenues slowdown from this year — and with this the possibility of crushing broker downgrades — makes the stocks dangerous picks in spite of their cheap valuations.
