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Next share price: what to expect from annual results

Next has been one of the great survivors of the past few years, successfully dealing with the growth of online shopping. But it faces hard choices relating to its bricks-and-mortar stores.

When is Next's earnings date?

Next reports earnings on 21 March, covering the year to the end of January 2019.

Next's results preview: what does the City expect?

Next is expected to report a 4.2% rise in headline earnings per share, to £4.33, while revenue is expected to rise 2.5% to £4.22 billion. The firm has beaten profit forecasts in seven of the last eight reports, but missed revenue forecasts five out of the last eight times.

Next has invested heavily in its online operation and, as a result it has weathered the crisis of the high street better than many of its peers. However, it looks likely that a downsizing of the bricks-and-mortar part of the empire is likely, even with strenuous efforts to integrate shops with online sales.

Sales in Next's stores are expected to fall in the upcoming results, even as total space has risen by 30% over the past eight years. Online sales growth is still the key driver for the firm as the higher margin element of the business. However, guidance for the 2019-2020 period still points to a decline, as an overall downturn in performance hits.

Unlike many of its competitors, Next retains a healthy operating margin, one that has been in the high-teens for some time now. Nonetheless, same-store sales continue to fall, and the convenience of 'click-and-collect' for shoppers is a double-edged sword for Next, which has seen costs rise, while the cost of online spending continues to increase as well. A programme of cost-cutting in store looks to have finally run its course, and as a result it may be that Next will begin to close stores in underperforming areas.

Next's hope is that online will continue to deliver. The problem for the firm is that investors have become used to these high margins that deliver such strong cash generation. The firm has been a strong presence in the UK for a long time, but now needs to expand overseas. This will be a costly exercise, and will be difficult to implement without acknowledging that cash generation may fall.

Competition from low-cost online sales continues to rise, and as a result Next may have to look at cutting costs to remain competitive. This comes at a time when increases in the UK living wage are boosting cost inflation, hurting margins. Consumer incomes have remained under pressure, so increasing prices is not a particularly attractive option. Indeed, the firm estimates that rising wages will eat into around 20% of pre-tax profit by 2020, and that it would have to raise prices by 6% in order to offset this fully. Such a price rise would hurt its market share and ultimately rebound on performance.

The demise of many stores on the high street has been an advantage for Next, in that it has been able to fight for lower rents for its stores. This cannot last forever, and should be regarded as short-term palliative to help deal with declining sales.

How to trade Next's annual results

Next currently trades at 11.7 times forward earnings, just above one standard deviation from its five-year average. The valuation has been declining throughout the second half of 2018, but rebounded from the lows of December.

Currently, the firm has 8 'Buy' ratings, eleven 'Hold' recommendations and five 'Sell' recommendations. The current median target price is £50.67, below the current price. The average move on results day has been 5.64%, but current options pricing suggests a move of just 1.8%, suggesting that this set of results may not see too much volatility.

Next's share price: technical analysis

Next's shares steadily recovered from their 2017 lows, but hit a peak in July 2018 around £62.00. The decline that followed saw the shares fall to just below £40.00, giving back most of the gains made since the beginning of 2018.

This has been followed up by a steady rebound, with a dip in February to £47.30 finding buyers. Gains stalled around £52.00, just below the 200-day simple moving average (SMA) of £52.29, but it looks as if further bullish momentum is about to intervene and carry the shares higher.

The next area to watch becomes £54.50, being the highs from September to November 2018. Gains stalled here, and lower highs were created, as the shares continued their fall in the second half of the year. A close above £55.00 brings £57.00 and the area around the gap down from July 2018 into play. Above this the July peak at £61.50 is the next target.

Conclusion: tougher times ahead but solid performance likely

Next faces a host of challenges, not least being the continued decline of the UK high street as more and more shoppers move online. But it is one of the strongest in the sector, providing healthy cash generation and a solid dividend with a relatively undemanding valuation. It has tough choices ahead of it, notably in regard toa its physical stores, and resolving this problem while continuing its online expansion will be a tough challenge. But the chart has the potential for a break higher, and Next retains its reputation as a solid performer.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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