Next's Q2 sales “blown” by warm August

ANALYSIS_ British retailer Next Plc. has admitted to have had a “stock blunder” due to a warmer than expected month of August that left the high street fashion brand short on summery clothes. Nevertheless, Next noted a 2.2 percent growth in

revenue to 1.68 billion pounds during the first half of its current fiscal year.

As pointed out by Matthew Taylor, an analyst at Numis Securities, “the retailer benefited from spontaneous buying as the sun shone in June and July compared with a dull summer in 2012,” reported ‘Interactive Investor’.

Next sales increased 2.2 percent to 1.67 billion pounds for the six months ended July, mainly driven by growth in online sales and addition of new retail space. It’s noteworthy that while retail sales at the fashion retailer dipped by 0.9 percent to 1 billion pounds, its online and directory sales gained 8.3 percent to 597.6 million pounds.

Pre-tax profit came at 271.8 million pounds in the six months to July 27, well ahead of last year’s comparable period’s 251.3 million pounds and also better than the analysts' average forecast of 268 million pounds, according to a Reuters poll.

After-tax profits improved by 26.3 million pounds as operating profits rose 7.2 percent to 284.9 million pounds.

Earnings per share (EPS) increased substantially, adding 19.9 percent to 142 pence, aided by share buybacks worth 170 million, as analysts at Beaufort Securities pinpointed. The company aims to return up to 250 million pounds and 350 million pounds through share buyback during the year. The company cites strong employment, growth in housing market, and ending of credit squeeze for the customers as the main macro-economic drivers for the performance in next six months. However, a fall in the real consumer earnings could pose a challenge. Brand sales target for full year were maintained at 1.5-3.5 percent. The interim dividend per share climbed 16.1 percent to 36p.

Steady performance despite August heat wave

Beaufort Securities supported Next’s performance in a note issued Friday, highlighting that the retailer “exhibited a steady performance for the half year, largely due to upbeat online Next Directory sales.”

“Newly added retail space seems to have worked wonders for the company, displaying 22 percent net margins. The company plans to continue with its strategy in this direction, with addition of further new space to the company’s retail portfolio. The share buyback plan of the company is also progressing well, with the potential to cause significant value addition for the shareholders, going forward,” summarised the analysis house, that has reiterated its ‘buy’ rating over the stock on the back of the news.

Commenting their failure to forecast stock provision needs for the warmer-than-expected August, Next management said volatile trading, with customers only buying new clothes when they need them, meant the warm August “worked against some of our clothing ranges”.

The retailer also explained that it did not have enough warm weather "transitional stock" to sell after its July sale and for the launch of its autumn range as temperatures reached their highest levels since 2006. Next did not quantify the impact of its stock blunder but dropped that unexpected factors like this might have a greater impact on their fabrics sourcing.