Shares in high street retailer Next are leading the FTSE 100 lower today after the company issued a minor profit warning. Specifically, the group announced that its central guidance for pre-tax profit for the full-year to end-January 2017 is now £792m, down from the £805m indicated previously. What’s more, management doesn’t expect trading conditions to improve any time soon, warning today that the 2017 trading environment will remain “challenging.”
Next’s deteriorating trading doesn’t bode well for the rest of the UK’s retail sector, and investors have responded by dumping shares in the company’s close peers Marks and Spencer (LSE: MKS), Debenhams (LSE: DEB) and Sports Direct International (LSE: SPD).
Sign of things to come?
Shares in Marks, Debenhams and Sports Direct are all falling in sympathy with Next today as traders bet that these companies will run into the same issues as Next in the near-term. As all of these businesses have already reported a deteriorating trading environment at some point during the past six months, investors and traders are right to be worried.
It looks as if the consumer’s move away from traditional stores towards online retailers such as Boohoo.com has accelerated over the past 12 months. While most online retailers have been reporting high double-digit annual sales growth, traditional bricks and mortar retailers have been reported sluggish trading. Next’s profit warning confirms this trend. While sales at the group’s Next Directory arm grew by a mid-single-digit percentage during 2016, store sales fell by more than 3%, dragging down overall group sales.
The same trends are expected to impact both Marks and Debenhams this year. City analysts are predicting a 12% decline in earnings per share for Debenhams for the year ending September 31. Earnings per share of 6.8p are expected on revenues of £2.9bn. For some comparison, back in 2012, the group reported earnings per share of 9.8p on sales of £2.2bn. So while Debenhams sales have grown, the group’s profit margins have collapsed, and shareholders have suffered. The shares have fallen 60% since 2012.
City analysts are similarly pessimistic about Marks’ outlook. For the year ending March 31, analysts are expecting the company to report earnings per share of 29p, down 17% year-on-year. Further, despite management’s efforts to revive the group’s fortunes, analysts are expecting a 1% contraction in earnings for 2018.
It should be said that as of yet, these forecasts don’t reflect the trading conditions referenced by Next today, so I wouldn’t rule out earnings downgrades in the near term.
More bad news?
Last year was one Sports Direct would rather forget. Shares in the retailer lost more than half of their value after several profit warnings and PR disasters. But even after these declines, the shares still look expensive today, and I wouldn’t rule out further declines.
For the year ending 30 April, City analysts have pencilled-in an earnings decline of 54% for the company. Earnings per share of 16p are expected, indicating that at current levels the group trades at a forward P/E of 17.3, a multiple more suited to a high growth tech company than a struggling retailer.
Conclusion
All in all, today’s profit warning from Next does imply that there could be yet more bad news on the horizon for Marks, Sports Direct and Debenhams as the UK consumer continues to favour online shopping over traditional stores.