Given just how gloomy the market has been on anything with a high street presence recently, it’s no surprise that today’s upbeat trading update from FTSE 100 retailer Next (LSE: NXT) has turned heads. Here’s why the shares were up almost 10% in early trading.
Next: back in business
Despite having been forced to close its stores as the UK went into lockdown, Next reported today it’s “in a much better position” than where it expected to be back in the spring.
While full-price sales were down 28% over the three months to 25 July, this result was better than even the best scenario painted in its last trading update in April. Online sales were understandably strong, rising 9%, as shoppers stocked up on casual clothing to wear at home.
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Elsewhere, Next reported its warehouse picking and despatch capacity had returned to normal levels. The company also benefitted from far fewer returns over the lockdown period as customers, unable to go back to stores, were being more selective with their purchases.
So, it’s time to buy?
I think there are arguments for and against buying shares in Next right now. One positive is that the company seems as prepared as it can be for whatever happens next.
Today, Next provided a set of scenarios on how the business might perform in three different trading environments. These had full-price sales for the full-year down 18%, 26% and 33%.
Encouragingly, Next believes the middle scenario (-26%) to be most likely at the current time. This assumes a 33% reduction in sales at its retail stores and a 7% fall in online sales. Should this come to pass, Next predicts pre-tax profits will come in at £195m. This is hardly a disaster relative to what other retailers are facing.
Another reason for backing the company now is its financial position. Thanks in part to the suspension of dividends and share buybacks, Next has been able to shore up its cash resources. As a result, net debt at the end of its financial year is expected to “fall significantly” (by between £460m and £650m). This should allow the company to hit the ground running when the coronavirus is finally sent packing.
Reasons to steer clear
Of course, Next’s management doesn’t know what will happen next better than anyone else. No one can say for sure how long social distancing rules will last. Nor can we predict how shoppers will behave a few months from now. Progress on a vaccine could slow and a significant second wave is possible as we approach the colder, winter months. Should the latter be the case (and another lockdown enforced), even Next’s worst-case scenario (full-price sales falling 33%) may prove optimistic.
Aside from this, there’s also the argument that most investors would simply be better off avoiding this and other sectors completely for the time being. Why take on extra risk when there are plenty of safer options elsewhere in the market?
Bottom line
Next has long proved itself to be a quality business in a seriously tough sector. Whether this makes it a buy at the current price is, however, still debatable.
As always, I’d caution any Foolish investor against throwing every penny they have at a single stock and ensure they’re sufficiently diversified elsewhere before taking a stake.
