Next: Out of fashion

Clothing retailer Next has released gloomy results, yet the firm’s shares rallied strongly. Why? Ben Judge reports.

Clothes retailer Next (LSE: NXT) has long been a stockmarket favourite. Between 2008 and the end of 2015, investors saw its shares rise by more 500%. But now things are looking grim. Last week, Next reported its first annual fall in profit for eight years and warned that 2017 “looks set to be another tough year”. Total sales fell by 0.3%, with a 2.9% decline in high-street sales not quite offset by a 4.2% rise in online sales via Next Directory, its mail-order business. Pre-tax underlying profit fell by 3.8% to £790m, and it expects profits for the coming financial year to be down as well, at between £680m and £780m.

The company’s outlook statement was “about as bleak as it gets”, says James Moore in The Independent. Next’s “Brexit-backing chief executive” Simon Wolfson “bemoaned higher import prices”, caused by sterling’s post-referendum slide, and highlighted the fact that people were spending less on clothes and more on “experiences”, such as eating out and going on holiday. To cap it all, he delivered a “supremely bleak analysis” of the prospects for the company’s 538 high-street shops.

Despite the “vast majority” of the company’s stores making a “healthy profit”, it is legitimate to question their long-term viability – and even “whether the possession of a retail portfolio is an asset or a liability”, says Wolfson in the company’s annual report.
He concluded that even if retail sales continued to decline, “the portfolio could be managed down profitably” over the next ten years. This is clever stuff by Wolfson, says Moore. In “positing a worst-case scenario”, he is softening investors up so that “when Next outperforms, he can take a bow”.

While Wolfson may have brought his “usual forensics” to the problem of falling sales, even if you allow for his “trademark gloominess”, he “hardly seems confident of a quick fix”, says Alistair Osborne in The Times. Perhaps the problem is with the man himself. Wolfson has become “too cool for his own good”. He spent too much energy focusing on “exciting new trends” while forgetting the boring stuff that makes up Next’s “heartland product”. “No one shops at Next for edgy fashion.”

Still, Wolfson “has a track record of correctly forecasting the direction of the British consumer, so ignore him at your peril”,
says Andrea Felsted on Bloomberg Gadfly. The question is what his firm’s woes might imply for other retailers. After all, “Next is highly cash generative” and still “has some levers it can pull to help its performance”, in contrast to, say, Marks & Spencer. This helps explain why the shares rallied strongly despite Wolfson’s downbeat comments. “Next offers some rare stability in a year that’s set to be a wild ride for UK retailers.”

Britain’s ten most-hated shares

Company Sector Short interest on 28 Mar Short interest on 22 Feb
Carillion Construction 21.5 22.99
Wm Morrision Supermarkets 17.45 15.86
Ocado Supermarkets 16.72 17.95
Mitie Group Outsourcing 15.23 14.82
Tullow Oil Oil and gas 14.25 14.41
Telit Communications Telecoms equipment 10.49 11.12
Debenhams General retailers 10.07 8.78
Sainsbury Supermarkets 8.69 8.64
Marks & Spencer General retailers 8.13 NEW ENTRY
Hansteen Holdings Real Estate Investment Trusts 7.54 NEW ENTRY

These are the ten most unpopular firms in the UK, based on the percentage of stock being shorted (the “short interest”). Short sellers aim to profit from falling prices, so it can be useful to see what they are betting against. The list can also be an indicator of stocks that might bounce strongly on unexpected good news when short sellers are forced out of their positions (a “short squeeze”). Hansteen Holdings, a FTSE 250-listed real-estate investment trust, is back in the top ten after news of the sale of German and Dutch properties sent the share price soaring to its highest since 2007.

City talk

 Back in August 2014, an accounting scandal led to Tesco overstating profits by £326m. Anyone who bought Tesco shares between 29 August and
19 September will get 24.5p per share in compensation under an £85m settlement with the Financial Conduct Authority. Tesco will also pay a £129m fine under a deferred prosecution agreement (DPA) with the Serious Fraud Office (SFO). But hold on, says Jim Armitage in the Evening Standard. Is this the right way to settle the scandal? “We should be uncomfortable” about deals that “rely on ‘co-operation’ from the accused, and don’t result in the public seeing all the gory inside details of a case through a trial… While it’s welcome that DPAs get a result of sorts for the SFO, they should not be seen as a substitute for full-blown prosecutions.”

Wolseley, the FTSE 100 building supplies firm, is to rename itself after its US arm, Ferguson, and will be traded under the ticker FERG from 31 July. Ferguson, which has been around for 64 years, contributes 84% of the group’s trading profit, so the new name will raise Wolseley’s profile in its biggest market. So how long will it be, asks Matthew Vincent in the FT, “before Ferguson plc accepts that it is essentially a US and Canadian firm — and opts for a full US stockmarket listing”?

Elon Musk, 45-year-old billionaire electric car evangelist, Tesla founder and space pioneer, has found time to come up with another project. Musk is hoping to develop what he calls “neural lace” technology that will implant “tiny brain electrodes that may one day upload and download thoughts”, according to The Wall Street Journal. As well as perhaps treating brain diseases, it’s thought Musk, who has said that artificial intelligence is humanity’s “biggest existential threat”, wants to “help humanity avoid subjugation” by intelligent machines.

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