Thursday, 23 March 2017

Results are what counts; Next Plc (NXT)

Well Next published their 2016/7 results and their first decline in annual earnings since the 2008 crisis. And the shares went up 8%. Classic value. Something of a relief rally then. The results were presented with doom and gloom across the press but that is because Next and M&S offer 'bellwether' outlooks on the UK economy and the press loves some gloomy news.

There were a few key takeaways for me from the press release;

UK retail sales declined 2.9% and remains the headline weak spot for Next. This is why most UK retailers are suffering low valuations.

But Next are a long term shareholder's dream! They are guiding down the difficult conditions in the retail market and even provide a sensitivity analysis of how they would wind down leases on stores if the LFL sales trend deteriorates...they do the job for you;

Next Plc Annual Results

Next's stormy guidance and outlook should be worrying shareholders of Debenhams - they are behind the curve and could go the way of BHS with their bricks and mortar model and large pensions gross liability (yes it is a net asset today but the total liability is 10x net profit - Next pension liability is 1x). One bright spot for high street stores is Next note declining rents on new openings (-24% yoy!); that is the nature of supply and demand people. What I wouldn't want to be right now is a commercial landlord or shopping mall.

Second the Directory business is still doing rather well. Next were well ahead of the curve building this business and they have not been resting on their laurels. They set out a clear and concise plan for further improvements. UK Directory sales rose 1.2% and overseas rose 18.5% (4 year CAGR is  23.4%) which provides essentially the glimmer of hope for growth for Next in the future. Operating margins also rose to 25.7% from 24.4% but much of this (100bps) came from one time effects of realigning the credit offering. 

Now on those overseas sales - it is much easier and less capitally intensive to distribute goods from the web platform than their small European store base (which had weak results but is <2% profits). And the CAGR for this business is showing excellent growth. A la ASOS. But the margins are much better at Next because ASOS has a 4-5% operating margin. That is right, Next have a 2000bps better margin than ASOS. And as I mentioned before Next are much cheaper.

The one thing that seems odd is the expressed guidance that the company won't be buying back shares. This seems rather bizarre given the drop in the share price and the previous buyback ceiling of ~£67 per share. I just find it incoherent. Frankly I would rather have the cash and reinvest the dividends as I feel buybacks are 'muddy' and I have all my investments in tax free wrappers so welcome the dividends. On the subject of Dividends the specials are back in again this year with 4 x 45p announced plus a 105p final to be paid in the summer. Next will therefore likely distribute £3.38 per share over the next 12 months. That is a yield of 8% at the closing price today! Not only that it is fairly sustainable given the FCF generation and lack of buybacks. They only call them 'special' so they don't get accused of cutting the dividend later if they change policies. (You get a 3.7% yield ex-specials)

Net debt looks like fine with debt covered by the customer credit portfolio and recent refinancing at lower rates bodes well for the future. The company remains investment grade.

Next Plc Annual Results

In summary I think these results are what any long term investor wants to see. A company refocusing on its core business, committed to effective use and return of capital, and managing intelligently a cyclical downturn. The market certainly agrees today. But who knows in the future.

Disclosure: I have established a modest long position in NXT. These are opinions only, not investment advice. If in doubt read my disclaimer.

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