Next cash flow message not lost in the online shuffle

Next’s cash flow message wasn’t lost in the online shuffle

Warmer weather and January blues

Next’s return to full-price sales growth has been welcomed—though the extent looks like it’s being exaggerated by the low basis of previous expectations. And the renewed sales growth comes with clear provisos. “We believe most of the increase in full-price sales is due to the warmer weather and, to a lesser degree, lower markdown sales at the end of season sale.” It’s an important qualification, though the swing into positive in monthly variance in June and (especially) July is striking, at 3% and 3.9%. It’s more than tempting to attribute a sensible proportion of the bounce to self-help measures rather than those out of the group’s control.

Next also cautioned that a similar deterioration to the one seen in ‘clearance rates’ at the end of season sale is likely to recur in the January 2018 sale. This is the reason it keeps central profit outlook unchanged, even after narrowing the sales guidance range. The caution makes the rise of the group’s stock by as much as 12% on Thursday look like a wager that improvements in Next’s channels and ranges that have carried the group back to the beginnings of an underlying sales upturn could gain momentum in 2018/19. At this point, Next doesn’t seem willing to express confidence in such a scenario. It remains wary of volatile seasonality. Additionally, the transformation of its inventory management systems, by our reckoning and company comments earlier in the year, would not yet be fully complete.  “I’m marginally less pessimistic than I was three months ago” Simon Wolfson said on Thursday.

Website shuffle and visible cash

Those mix improvements do include a startling 11.4% rise in the digital channel pointing to some contribution from the apparent success of Next’s www.labelonline.co.uk/ launched earlier this year. At the time, it was pitched as part brand aggregator as well as partly a branch of Directory. Since the URL now resolves directly to a more obviously recognisable Next Plc. website (as do searches for Directory) it will be interesting to see if there is any noticeable impact on the digital channel.

The group is clearly more confident about the path to increased free cash flow than profit growth. On the former it has “greater visibility” and sees £50m in surplus cash remaining after distributing four quarterly special dividends. The only uncertainty is whether the outstanding sum (probably more) will be made available to shareholders via another special dividend or a share buyback. As for the wider uncertainty on profit and revenue growth into the next financial year, that is likely to retreat further from the top of investors’ minds so long as the group continues to demonstrate its ability to keep up the clip on cash flow.  Combined with the promise of a more nimble Next whose online volumes are growing faster than comparable rivals, Next shares have a good chance of erasing their loss in the year to date by the end of 2017.

• Next shares retain a notable peculiarity that we noted the last time we wrote about the group: the stock is not only among a handful of FTSE 100 unfortunates that has so far failed to recover from its collapse on the day after the Brexit vote (24th June 2016) but has also spent all of that time within a clear range of about 5435p-3565p
• The range represents a protracted consolidation which has both positive and negative implications. On the one hand, underlying support is very evident, but on the other, sentiment is not quite good enough for the stock to progress
• Somewhat more positively, Thursday’s surge, the stock’s best daily rise this year, has shifted it above troublesome resistance at 4226p. However, the temptation that traders may have to fill the gap that was created by Thursday’s bump could mean the stock doesn’t stay above the line for long—it has attempted to achieve escape velocity several times already
• At the moment, chances that the stock can sustain its up leg for long enough to expand its range do not look particularly great. One positive is that the shares have sidestepped the declining line that properly connects a high on 24th March 2016 to prices seen as recently as last week; and of course, Next’s general declining trend goes back even further
• Bears will be looking for a failure of the stock to quickly recapture Thursday’s high (4491p) though bulls are unlikely to be truly disturbed while Next’s rectangular range remains intact on the downside