Today Im running the rule over two major newsmakers in Wednesday trade.
Sales struggles
Clothing giant Next (LSE: NXT) prompted shockwaves across the retail industry in March after taking the hatchet to its full-year forecasts, the firm warning of tough conditions in the months ahead for the UK high street.
And Next sounded the klaxon again on Wednesday after posting weak quarterly results. The retailer said that sales had dropped 0.9% during February-April, with Next commenting that “the poor performance of the last six weeks may be indicative of weaker underlying demand for clothing and a potentially wider slowdown in consumer spending.”
This insipid performance has forced Next to scale back its revenue expectations yet again. The retailer now expects full-price sales in the 12 months to January 2017 to range between a 3.5% fall and a 3.5% rise. The company estimated last month that full-year sales would clock in between a 1% fall and a 4% increase.
Traders have shrugged off this latest batch of news, however, in stark contrast to the panic selling that greeted March’s disappointing update — indeed, Next was recently 4% higher in Wednesday’s session.
Still, I believe shrewd investors should sit on the sidelines rather than pile into the retailer, as the impact of cooling shopper activity could prompt further forecast cuts in the months ahead. And of course the retailer also has a fight on its hands to stave off intensifying competition, particularly at its Next Directory arm.
So even though Next deals on a very-cheap P/E rating of 11.5 times for the current period, I reckon the strong prospect of earnings downgrades by City brokers could send this number spiralling higher.
Profits pummelled
The latest financial statement from grocery giant Sainsbury’s (LSE: SBRY) on Wednesday wasn’t much better either.
The supermarket announced that group sales dipped 1.1% in the 12 months to March 2016, to £25.8bn, with like-for-like revenues dipping 0.9% in the period. Consequently underlying profits slumped 14% year-on-year, to £587m.
And worryingly, Sainsbury’s advised that “the market is competitive, and it will remain so for the foreseeable future.” This outlook has sent the firm’s shares 4% lower from Tuesday’s close.
And the problems over at Sainsbury’s were underlined by latest Kantar Worldpanel numbers also released today. These showed sales at the retailer fell 0.4% during the three months to 24 April, the company’s first sales reversal since last July.
The retailer is desperately scrambling to mitigate the impact of an increasingly-fragmented grocery sector, an environment driven by the explosive rise of Aldi and Lidl. But despite massive brand investment and improvements to its multi-channel approach, Sainsbury’s clearly still has plenty of heavy lifting in front of it just to stand still.
So while the supermarket may change hands on a reasonable P/E rating of 13.5 times, I believe the worsening retail landscape still makes Sainsbury’s an unattractive stock selection at the present time.
