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 quarters 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 statutoryprofit before tax for the year to bein arange of785m to 825m compared to775m to 845m as was previously expected.
Former market darling
Next used to be one of the FTSE 100s most loved stocks. Between the end of 2011 and end of 2015, the companys shares returned over 200% for investors via a combination of sales growth and well-timed share repurchases. These returns excluded thesubstantial 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
Nexts 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
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traditional bricks and mortar stores and its catalogue/online division. But it seems as if the company has tripped up and the headwinds buffeting otherretailers are now weighing on the groups growth.
The most severe headwind is the falling desire by UK consumers to spend on clothing. Indeed, the number of clothes sold at the UKs 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 analystGeoff Ruddellconsumers 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 isnt a pureplay clothing retailer as it also sells furniture and homewares, so the company wont be as affected as some of its peers by the UK consumers 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, its clear to me that Nexts outlook will most likely deterioratefurther before it gets better. With this being the case, I would avoid the company for the time being until the outlook improves.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
