Next third-quarter sales rise: What the analysts say

“The third-quarter trading update was broadly in line with market expectations but better than our projections. In the mix, the retail sales were better than projected, offset by weaker directory sales, although there was some impact from the timing of the summer Sale.

“The figures benefited from easy comparatives in September and late October, which last year were impacted by the relatively warm weather.

“Encouragingly, the company has increased the low end of its profits guidance. It now expects brand sales to grow by between 4% and 6% and pre-tax profits from £810m to £845m.

“Momentum going forward is now more reliant on developing the directory, including Label, overseas while UK sales mature.” – Freddie George, Cantor Fitzgerald

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“Next has confirmed its full-year pre-tax profit guidance and broadly hit consensus in third-quarter sales estimates. However the shape of the third-quarter performance being stronger than expected in retail and weaker in directory is clearly going to play on investors’ perception that the growth engine of recent years – directory – is slowing despite considerable efforts on the part of management to re-invigorate it.

”Our overall view here is that the moves made to stimulate sales growth in the directory have not really been working. As stated at the interims, reduced minimum payments on outstanding balances have been in place since early in the year, click-and-collect has extended year on year and we would have imagined both should have contributed to sales growth by stimulating both service income and product growth.

“It is becoming clear in our view that international is the only real growth business in directory and alone is too small to drive group profitability. Clearly on the plus side retail has performed ahead of expectations. No sensible investor is likely to be buying a clothing retailer at peak margins on its physical store prospects. But it is likely that retail will have a good season against weak comparatives and that is still a good achievement in the near term.” – Tony Shiret, Haitong Research

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“We view a better performance in retail as a positive read-across for the UK clothing sector, and we think Next could also be benefitting from ongoing space allocation in new openings towards its Home fascia.

“Given weak comparatives, acceleration from the first half (+3.5%) was expected, reflected in September benefitting from weaker comps and normalised trading conditions.

“Directory full-price performance is weaker than expected, unlikely to ease near-term concerns over potential loss of more lucrative credit customers into cash over time. In our view, Next’s current valuation is up with events, with its prospective yield underpinning the shares.” – Alistair Davies, Investec

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“Next remains a core holding in our view within the sector. This stems from its consistency on the trading front and its equally consistent adherence to its policy to return “surplus cash” to shareholders via either share buybacks or special dividends.

“Next has effectively decided to exclude from its definition of surplus cash the anticipated £200m outflow from the step up in directory debt arising from lowering the minimum monthly repayment on outstanding balances from 9.5% to 5%. This is despite driving a projected overall cash outflow of circa £155m for the company in the full year.

“The increased directory debt is to be funded from the balance sheet, rather than by reducing the free cash available for special dividends or share buybacks. The flow of future special dividends therefore looks secure at present.” – David Jeary, Canaccord Genuity