Market sentiment is gradually improving, but stock pickers need to remain on high alert. I recently explained why Shell is one to avoid, despite its meaty share price gains of Wednesday. It’s not the only FTSE 100 trap waiting to snare investors though.
Next (LSE: NXT) is a share I’d also happily avoid today. The supermarkets might be enjoying a sales boom right now, as panicked shoppers stockpile essentials. The story is very different for retailers that specialise in discretionary items.
The latest Distributive Trends Survey from the Confederation of British Industry (CBI) illustrates this point perfectly. This shows “non-store retailers reported a fall in sales volumes” in the year to March, and that “internet sales growth slowed to a below-average pace.”
Things have been particularly bad for the likes of Next too. A net balance of -75% of clothing retailers reported a reversal of sales volumes in the period. Conditions also look set to remain difficult next month — a net balance of -26% of survey respondents said sales volumes would likely decline in April. This is the worst reading for 11 years.
Troubles spread online
What’s particularly worrying for Next and its peers is that the report only ran up to the period to 13 March. The trading picture has worsened since then. Government directives has demanded all sellers of non-essential goods and services shut up shop to halt the spread of coronavirus. It’s an order which is expected to remain in place until at least the summer.
Clearly though, Next doesn’t just have to fear sinking revenues from its physical stores. That CBI study shows online shoppers are also reining in spending following the Covid-19 outbreak. I fear trade could get more and more difficult for the retailer’s Next Directory e-commerce division, as the UK economy steadily sinks and unemployment rates likely explode.
The FTSE 100 retailer attempted to assuage nerves last week. In full-year financials, it estimated that even if full-price sales dropped 25% in 2020 because of the coronavirus — representing a gigantic £1bn hit to the top line — that it could “comfortably” absorb the blow without exceeding its current bond and bank facilities.
It also advised that while its stress tests included the benefit of government plans to grant business rate holidays, it didn’t incorporate other measures such as wage support.
Cheap for a reason
However, this statement isn’t enough to tempt me to buy in. I worry that Next’s sales could fall off by more than a quarter in the current climate, a situation that could cause some serious financing problems.
Next could also face problems keeping its supply chain in tact as infection rates spread. An alarming fall in the pound (it hit its lowest for almost four decades against the US dollar recently) provides an added cost problem too.
Next is pretty cheap at the moment. It trades on a forward price-to-earnings (P/E) ratio of 9.5 times, a reading its fans would argue reflects the coronavirus threat. It also carries a bulky 4.1% dividend yield as a bonus.
It’s not a compelling enough reason to encourage me to invest though. The Footsie’s packed with low-cost, dividend-paying shares right now. And I’d spend my investment cash elsewhere.
Royston Wild 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.