FTSE 100 retail giant NEXT (LSE: NXT) acquired the dubious distinction of being the biggest faller yesterday with a decline of 5.7%. This was the largest single day change in its share price since its trading update on July 31, which led to a price rise of almost 8%. The company’s detailed half-year results released yesterday were the most likely reason for the sharp drop.
But I still found the fall mind-boggling, and for two reasons.
Headline results look fine
First, the results were actually quite healthy. For the half-year ending July, the company reported a full-price sales increase of 4.3% and an increase of 2.7% in profit before tax. And second, a positive trading update for the period was already released at the end of July. The only difference now is that a more detailed picture is available, while only the top-line and full-year guidance were available in the previous release. And what’s more, the guidance hasn’t changed either.
More than meets the eye
Clearly then, it’s the detailed results’ fine print that’s giving investors the chills. And indeed, the outlook for the ongoing third quarter is far from rosy. The company expects it to be its weakest in the year, explaining that the strong performance in July brought forward some of the August sales and also that a warm start to September has impacted sales this month. But it expects growth to pick up in the fourth quarter.
CEO Lord Wolfson’s outlook is also likely to have impacted sentiment. While acknowledging that the company is better placed in terms of financial performance than five years ago, he says that it’s still facing challenges in terms of volatile consumer markets and a rapidly changing online world.
Balancing factors
NEXT sounds relatively upbeat on our EU exit. Yet along with its results, the firm released its updated ‘Brexit Preparation and Impact Analysis’ report, which highlighted two long-term Brexit-related risks. The first is the question mark over how well UK ports will be able to manage changed customs procedures and the second is about ensuring that long-term tariffs are not passed on to the consumer.
It concluded by saying that as long as these two factors are addressed, the company believes it “can manage the business to ensure no material cost increases or serious operational impediments.” This is important to consider for the UK-focused retailer, which could be heavily impacted by a disorderly Brexit.
To buy or not to buy
At the time of writing, the share price has already risen sharply from yesterday’s lows. I reckon that in the days to come it will rise even further. There’s no doubt that risks exist, but given its recent performance and the foreseeable future, there’s enough room for optimism, which makes it an investment well worth consideration, I feel.
