Until the beginning of August, Next (LSE: NXT) was one of the FTSE 100’s top performing stocks. However, after publishing worse-than-expected trading figures at the beginning of the month, shares in the fashion retailer have slumped by more than 11%.
As market sentiment turns against Next, I’ll later explore another retail sector champion that could be a better buy for your portfolio.
Disappointing update
Shares in Next gained investor support throughout the first half of 2018 as the company smashed growth expectations. In May, the firm reported that full price sales for the 14 weeks to May 7 jumped 6% year-on-year, led by an 18.1% increase in online sales.
After reporting these numbers, shares in the company leapt higher. It seemed Next had cracked the code of online retailing. Unfortunately, growth slowed during the second half.
For the 12 weeks to the end of July, total sales grew 2.8% and online growth slowed to 12.5%. What’s more, in its August trading update, the company warned that business throughout the second half of 2018 is likely to disappoint. After a profitable first half, management is expecting more subdued sales growth throughout the rest of the year.
For the year to January 2019, management is forecasting full-price sales growth of 1%. At the half-year mark, full-price sales were up 4.5% year on year. Based on these numbers, it seems management is expecting a significant deterioration in trading throughout the rest of the year.
Looking at this outlook, I’m not surprised investors have turned their back on Next. Shares in the company aren’t particularly cheap, trading at a forward P/E of 12.4, which to me seems appropriate for a business that is hardly growing.
But over at Next’s peer Dunelm (LSE: DNLM), the furnishings and home goods retailer is trading at a forward earnings multiple of 11.8, for example.
Online retail champion
There are other reasons to like Dunelm over Next. Even though the warm summer has kept consumers out of its stores, the group’s online business has blossomed.
A July trading update reported growth at its online business of more than 40%. Overall trading revenues for the period were flat as online growth offset the offline decline.
For the full year, the company is expecting to report a dip in profits. Pre-tax profit before exceptional items will fall to around £102m from £109m based on current trading conditions. Declining earnings are a result of losses taken on two businesses Dunelm has acquired, Worldstores.co.uk and Kiddicare.com.
Worldstores business accounted for around £8.5m of those trading losses. However, management expects losses to reduce “significantly” in 2019.
Considering Dunelm’s investment in its business and growth of the online arm, I reckon the company has a better outlook than peer Next.
And with a dividend yield of 5.5%, Dunelm’s shareholders will be paid to wait for growth to return. Next yields around 4.4% including special dividends.
