The bear case for Next plc

Shares in Next (LSE: NXT) are rising today after the company released a downbeat, but in-line trading update for the past quarter. 

For the three months to the end of October, full price sales across Next stores and Next Directory fell 3.5%. The company also said total sales, including markdown sales, for the year-to-date were 0.4% up on last year. However, after the October quarter’s poor performance management adjusted its full year sales guidance to between -1.75% to +1.25% compared to its previous range of -2.5% to +2.5%.

The firm now expects statutory profit before tax for the year to be in a range of £785m to £825m compared to £775m to £845m as was previously expected.

Former market darling 

Next used to be one of the FTSE 100’s most loved stocks. Between the end of 2011 and end of 2015, the company’s shares returned over 200% for investors via a combination of sales growth and well-timed share repurchases. These returns excluded the substantial dividends the company paid to investors along the way. 

However year-to-date, shares in Next have lost around a third of their value as investors have switched off the company. Unfortunately, I believe there are further declines to come. 

Stormy times ahead

Next’s biggest problem this year is a lack of growth as its latest figures show. In the run up to 2016, it appeared as if the company had cracked the UK retail market through a combination of both traditional bricks and mortar stores and its catalogue/online division. But it seems as if the company has tripped up and the headwinds buffeting other retailers are now weighing on the group’s growth. 

The most severe headwind is the falling desire by UK consumers to spend on clothing. Indeed, the number of clothes sold at the UK’s largest retailers has dropped by a staggering 4.4% on average in five of the past six months. 

This trend is nothing short of astonishing. According to Morgan Stanley retail analyst Geoff Ruddell “consumers are switching their spending away from apparel to an extent we have never seen before.” In fact, this is the first time in two decades that clothing volumes have gone into reverse. According to the Financial Times “apart from brief hiccups in 2011 and 2012, people have been steadily buying more since 1999.”

Next isn’t a pureplay clothing retailer as it also sells furniture and homewares, so the company won’t be as affected as some of its peers by the UK consumer’s change in buying habits. That being said, according to figures from the Confederation of British Industry, overall retail sales unexpectedly fell during September with two-thirds of companies surveyed reporting falling year-on-year sales volumes. 

The bottom line

After taking all of the above into account, it’s clear to me that Next’s outlook will most likely deteriorate further before it gets better. With this being the case, I would avoid the company for the time being until the outlook improves.