Next H1 results: will the share price recovery continue?
Next has revealed sales have started to bounce back after being hit hard during the coronavirus pandemic, but will the fashion retailer be able to sustain the recovery for the rest of the year?
- Next said in late July that it expected to perform much better this financial year than it originally predicted when the pandemic started, but still expects to report a steep fall in sales and profits.
- The strength of its online operations, which already account for the majority of sales, is vital to its ability to recover.
- Sales started to bounce back in the second quarter (Q2), paving the way for the recovery to continue as it enters the second half (H2), but Next remains cautious and has warned that a rise in unemployment once the furlough scheme ends could hit sales later this year.
- Next shares have risen over 75% since hitting a low in early April and have outperformed the wider retail sector, but they remain well below their pre-pandemic levels.
When will Next’s H1 results be released?
Next will release half year results on Thursday 17 September, which will reveal the fashion retailer’s performance over the 26 weeks to 25 July 2020.
Next H1 earnings: what does the City expect?
Investors will be feeling cautiously optimistic ahead of Next’s H1 results. Next painted a picture of doom and gloom earlier this year when it tried to predict the impact of the coronavirus pandemic too early, but confidence has started to be restored after the retailer said it has began to recover.
It revealed in a trading statement in late July that full price sales in Q2 fell 28% year-on-year (YoY), but this was well received considering Next had warned sales could fall by over 50% and that it was a stark improvement from the 38% slump in sales reported in Q1. We also know that sales were only down 8% YoY in the six weeks to late July, suggesting sales were well on there way to recovering.
The better-than-expected performance in Q2 also prompted Next to update its guidance for the full year, with its central scenario forecasting over £1 billion of lost sales in the year to the end of January 2021. However, the forecasted 26% slide in sales this year is still considerably better than the original prediction it made when the pandemic started, when it warned investors to brace for a 35% slide in annual sales.
|Upside scenario||Central scenario||Downside scenario|
|Full price sales movement||-18%||-26%||-33%|
|Full price sales||-£700 million||-£975 million||-£1.25 billion|
|Markdown sales||-£95 million||-£85 million||-£70 million|
|Total lost sales||-£795 million||-£1.06 billion||-£1.32 billion|
The momentum in recovery is what Next investors will be looking out for in the H1 results. There is no doubt that this year will bring a substantial fall in sales and profits, but investors are concentrating on Next’s ability to recover at a time when the survival of so many retailers is in doubt.
For Next, its saving grace has been the investment it has made into its online proposition. The retailer was already generating just over half of all sales online before the pandemic, so it was better prepared for the dramatic shift to online shopping during lockdown than many of its high street rivals.
Next’s online sales have already returned to growth, which is vital considering customers are still not returning to its stores. Next’s online sales plunged 32% YoY in Q1 but posted 9% growth in Q2, while its store sales fell 52% in Q1 and then by a staggering 72% in Q2. This balances out at an 11% fall in online sales and a 62% plunge in store sales over H1 as a whole.
Next has admitted that improving and growing its online channel is vital to its recovery. Store sales were already in decline before the pandemic and this was one of the reasons why Next invested in its online operations in the first place. The fact store sales slumped more in Q2 than Q1 provides little hope that they will recover anytime soon, especially if a new national lockdown is introduced.
It has already increased capacity of its warehouses that serve online customers after they came under strain in the early stages of lockdown. This includes the introduction of 24-hour shifts, which demonstrates the level of demand that Next is dealing with.
Still, Next’s earnings will be severely hit this year – the question is by how much. Its latest central scenario suggests pretax profit will be around £195 million this year, down from over £700 million in the last financial year.
|Upside scenario||Central scenario||Downside scenario|
|Ebitda||£500 million||£365 million||£185 million|
|Pretax profit||£330 million||£195 million||£15 million|
|Decrease in net debt||£480 million||£480 million||£330 million|
The guidance should be taken cautiously. Next already made a rash decision to post guidance during the chaotic early stages of lockdown, especially when most retailers said it was too uncertain to provide any form of outlook.
While Next has started to recover in term of sales, there are questions over how long this will continue. Next has warned that the economy could look very different later this year once the government’s furlough scheme ends in October.
Many people are expected to lose their jobs once the government support is pulled, causing a rise in unemployment and a curtailment in consumer spending. It has been a rough ride for Next in H1, but investors should be wary of expecting a smoother one in H2.
Still, Next is proving to be more resilient than some and investors should also take confidence from the fact Next is determined to reduce debt at a time when many companies are being forced to build their debt piles to weather the storm.
The company intends to cut debt by at least £330 million this financial year even in its worst-case scenario, and is hoping to payback £480 million if it can. That latter figure would bring down debt by 40% to around £650 million. Next’s decision to suspend its dividend and buyback means it will save almost £500 million this year, and it has freed-up another £180 million by cutting spending and selling-off and leasing-back its head-office and a warehouse.
Next H1 earnings consensus
Consensus estimates compiled by Reuters show the market is expecting Next to post a 40% fall in revenue and to be pushed to a loss at the bottom-line in H1.
|H1 2020 results||H1 2021 results|
|Revenue||£2.06 billion||£1.24 billion|
How to trade Next’s H1 results
The release of results and earnings is always a trigger moment for a stock, and Next’s H1 results will be no different. You can speculate as to whether you think Next shares will rise and buy (go long) or, if you think they will fall, sell (go short) using CFDs.
- Create an IG trading account or log in to your existing account
- Enter ‘Next PLC’ or its ticker, ‘NXT.L’ in the search bar and select it
- Choose your position size
- Click on ‘buy’ or ‘sell’ in the deal ticket
- Confirm the trade
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Next shares: broker recommendations
Brokers have very mixed views on Next and its outlook. The average rating among the 22 brokers that cover the stock, according to Reuters, is Hold and the average target price is 5,547.29p – which is around 7% below the current Next share price.
|Number of brokers|
|Average target price||5,547.29p|
For added perspective, 78% of IG clients that have open positions on Next are currently going long, meaning they are expecting the share price to rise, while 22% are short and anticipate the Next share price falling.
Next share price: technical analysis
Next has been one of the better UK performers since March, continuing to rally even as the FTSE 100 falters. The price touched a new higher high in its ongoing uptrend in the second half of August, reaching its highest level since H1 of March.
While it then dropped back to the 200-day simple moving average (SMA) of £56.48 it has recovered and looks set to keep moving higher. It now targets £62.30, the previous high, a level that was also resistance in March, when a brief rebound to this level was followed up with the real selloff that took the shares to their £35 low. The August pullback also hit rising trendline support from early April, providing further confirmation of the uptrend.
Sellers will have to see the price below £56.20 to take a bearish view; this would put the price below trendline and horizontal support, and also below the 200-day SMA.
Where next for Next?
Next’s latest trading statement covering Q2 has provided some optimism to shareholders by demonstrating that its investment in its online channel is paying-off and that sales have started to recover. The main question that will be asked when the H1 results are released is whether or not this recovery is set to continue as it enters H2. A further change in guidance – whether it be an upgrade or downgrade - cannot be ruled out.
However, many will fear that the outlook will be geared to the downside and that more headwinds are on the way as the threat of a second national lockdown start to emerge and the end of the furlough scheme threatens to disrupt an already fragile economy.
There are questions over the outlook for Next and the wider retail sector, but the stock has started to emerge as one of the stronger companies within the UK retail sector. Next shares have risen 67% since markets tumbled to their lows on 23 March, comfortably outperforming the wider retail sector that has recovered by just 54% over the same period.
Even if things don’t go smoothly in H2, investors have found some confidence in Next’s determination to lower debt and strengthen the balance sheet this year at a time when others are stretching theirs to survive. This, in turn, should allow it to bring back dividends and buybacks at a quicker rate in the future, although nobody is expecting them to return anytime soon.
Brokers have mixed views on Next but, on average, believe the stock is adequately valued and trading slightly higher than its current target price.
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