Fashion retailer Next (LSE: NXT) issued a profit warning this morning, blaming unseasonably warm October weather for a shortfall in sales that will hit full-year profits.
The damage is relatively minor: a 3% cut in full-year profit guidance, reducing the central pre-tax profit forecast from £795m to £770m. That’s still a healthy increase of between 8% and 14% on last year, and Next still expects full-year sales growth of 6%-8%, down from between 7% and 10% previously.
Overall, Next still looks like a strong performer to me.
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Is there worse to come?
I don’t always trust companies who blame their problems on the weather, but I trust Next, for several reasons.
1. Next quite openly admitted that the good summer boosted sales during the first half of the year.
2. It’s not unusual for unseasonal weather to disrupt sales in the fashion industry, and at the end of September, Next made it clear that it would cut sales and profit guidance if the weather didn’t turn colder in October.
3. Unlike so many other companies, Next’s corporate reporting is clear and consistent, and it always provides a prompt explanation if expectations are missed or exceeded.
Is Next a buy?
Next shares are down by 2% as I write, and are 8% lower than they were at the end of September, when the firm warned investors that profit guidance could be cut.
Before this morning’s announcement, consensus forecasts for Next’s earnings this year were 410p per share. If we trim a little more from this and assume earnings will be around the 400p mark, Next currently trades on a forecast P/E of 15.8, with a prospective ordinary dividend yield of 2.4%.
On top of that, Next has paid three special dividends of 50p so far this year, when its share price was too high to meet the firm’s strict (and public) criteria for share buybacks.
However, I’d rate Next as a hold, rather than a buy: the firm’s sales have only grown by an average of 2% per year over the last five years, while operating profit has risen by 6.4% per year, boosting the firm’s operating margin. I suspect that Next’s profit margins may be reaching a realistic maximum, which means that earnings growth could slow over the next few years.
If you’re trying to build a portfolio that will outperform the market, I think there are better options in today’s market than Next.
