Aside from those operating in the travel and leisure industries, few stocks are likely to be impacted more by the coronavirus outbreak than those in retail.
With stores mostly empty and few bothered about looking their best working from home, clothing sellers are particularly vulnerable. Purchases of a discretionary nature can be delayed a lot longer than staples, such as food and hygiene products.
Not that this appears to be bothering those buying shares of FTSE 100 stalwart Next (LSE: NXT) today following the release of its latest set of full-year numbers.
Stress test
Total sales rose 3.3% to £4.36bn over the year to 26 January. As you might expect, online remained the star division with sales jumping just under 12% to £2.15bn. Store retail, once again, proved a drag, falling 5.3% to £1.85bn.
All told, pre-tax profit came in 0.8% higher at £728.5m. This was slightly ahead of the £727m predicted by the company back in January as a result of “better than expected” full-price sales that month.
Is all this relevant to the current situation? Arguably not. Investors look forwards and, right now, the outlook looks considerably less rosy than it once did. Nevertheless, it looks like Next will be able to weather the storm better than most of its peers.
Having performed a stress test on its business, the £5bn-cap announced today it could “comfortably sustain” a fall of 25% in annual full-price sales (equivalent to a £1bn loss) without going over its current borrowing facilities. That should give those already holding huge comfort during these troubled times.
They may also be reassured by management’s belief that, pandemic or not, it could not afford to neglect transforming the business in response to structural changes in the sector. This, it stressed, would be what determines its “longer term destiny.” This kind of thinking is exactly what investors need to hear right now.
Next is undoubtedly a classy business. That said, I can’t help thinking today’s boost to the share price will prove (very) temporary. It goes on my watchlist for now.
Sales tank
Another clothing-related stock suffering as a result of the coronavirus outbreak is luxury fashion brand Burberry (LSE: BRBY).
Today, it revealed trading had “deteriorated significantly” since its last update. Despite seeing some improvement in China, like-for-like sales in its stores elsewhere had fallen between 40% and 50% over the last six weeks.
With roughly 40% of sites now closed, with more expected in the new few days, things are likely to get worse before they get better. Indeed, Burberry already expects retail sales to drop by 30% in the fourth quarter of its financial year.
To reduce pressure on the business, the company has announced it’s in the process of “renegotiating rents, restricting travel and reducing discretionary spending.” Like Next, it also sought to reassure investors that it had “significant financial headroom” for dealing with the disruption caused by the virus.
Seeing the value of my relatively small holding tumble over recent weeks hasn’t been easy. However, I do expect this quality brand — like Next — to recover its mojo in time.
The road ahead will be bumpy but I’ll continue to drip-feed my money into the stock over the months ahead.
