Broker view – why shares in Next are a ‘hold’

24th March 2016

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As Next reports its full year results Helal Miah, investment research analyst at The Share Centre, explains why he is calling the shares a ‘hold’…

Next shares opened down by 7% this morning as it reported full year revenues of £4.1bn, up 3% but slightly short of consensus expectations. It was disappointing to see sales at its retail stores to increase by just 1% despite a 4% increase in floorspace, but some of this could be blamed on the unseasonal weather patterns over the year.

However, margins at it stores saw a modest improvement as more items were sold at full prices and their own buying prices beat expectations. As is the case with most other retailers, strong growth was seen in their online and directory business where sales grew by 8%, but this was held back a little due to stock availability. Group pre-tax profits increased by 5% to £821.3m.

The shares have now lost nearly a quarter of their value since the end of December and clearly investors are losing confidence that the group can keep pace with its own successful track record. Management still see growth prospects and will continue to expand the floorspace and invest in the online business, and investors should be pleased with the international sales growth. The full year dividend was raised by 5%.

Management acknowledged that there is great uncertainty in the global economy for 2016 and that this year could see the hardest trading conditions for the group since 2008. We remain cautious on the group as it has traditionally traded at a higher price to earnings ratio than its peers.

While the lower price may be attractive to some, we can at best recommend a ‘hold’ for investors seeking a balanced return and willing to accept a medium level of risk.

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