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Here’s why shares in FTSE 100 stalwart Next are falling today

Shares in clothing retailer Next (LSE: NXT) were in the red this morning as investors reacted negatively to the latest set of interim results from the FTSE 100 member.

Since the behaviour of a company’s share price over the short term is often the product of little more than market expectations, however, I see no cause for concern. Before explaining what I mean by this, let’s check those numbers.

Guidance unchanged

Total group sales were up 3.7% to £2.06bn over the period. While this appears respectable enough, the breakdown of sales between its stores and online is far more revealing. 

Sales on the high street fell to a little under £875m over the period — 5.5% less than in 2018. Although unwelcome, this result was actually better than the firm had predicted.

As one might expect, however, online sales continue to motor ahead with a 12.6% rise to just over £1bn. The fact that even a high street stalwart like Next now makes more cash via this channel is evidence of just how the retail landscape has altered over the years and where efforts must be focused going forward.

Total pre-tax profit over the six months came in at £319.6m, a 2.7% improvement on last year. Once again, however, the difference between the high street and online was striking with the retail estate logging a 23.5% fall in profit to £56m while the latter increased by 8.4% to £177.1m.

In light of today’s figures, Next made no changes to its expectations for the year with total full-price sales expected to rise 3.6% and pre-tax profit likely to be 0.3% higher (at £725m) than in 2018. This reluctance to raise guidance is a break from tradition for a company which had previously turned under-promising and over-delivering into an art form and, I think, helps to explain why the shares are down 4% as I type.

It might not be the only reason though. Given the impressive gains in the share price since the beginning of the year (+48%) and the ongoing political deadlock surrounding Brexit, it’s perhaps to be expected that some investors chose to bank some profit today.

Best of a bad bunch

Despite this, there can be little doubt that Next remains a quality outfit and one of the best in a troubled sector. Returns on capital have been far better than the vast majority of its listed peers and the company’s gradual shift into becoming a multi-brand destination for shoppers shows a desire to evolve with the times (something some retailers have struggled to do).

Next’s income credentials are also solid. While offering nowhere near the same cash returns as some of its poorly performing top tier peers, those investing for income will likely be pleased with the 4.5% rise in the interim dividend to 57.5p per share announced today. Assuming analysts are correct in their calculations, the company should return 170p per share in the current financial year, equating to a yield of 2.8% at today’s share price. Importantly, this total dividend looks set to be covered well over twice by profits.

While no longer compellingly priced, the shares also still offer good value in my opinion, trading at 13 times forecast earnings. Of course, whether prospective investors get a chance to capture a slice of the company at a lower valuation in the event on a no-deal EU departure remains to be seen.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.