Next’s shares touched a seven-month high on Thursday morning, after the company confirmed negative full price sales growth in a trading update ahead of its interim results.
Although the brand took in 0.7% higher total sales in the second quarter, thanks to a warm weather sales spike in June and July, year-to-date sales were down 1.2%.
Its retail division continued to drag down the group’s overall performance, bringing in -7.4% sales over the second quarter, a marginal improvement on the first quarter’s -8.1% sales.
The decline in sales did not deter Next’s shares, which shot up about11% to £44.60p per share as markets opened, making it the biggest FTSE 100 riser by a long way.
The “dramatic market reaction to better-than-feared second-quarter results shows just how much bad news is baked into the share price,” said Lee Wild, Interactive Investor’s head of equity strategy.
Next was just highlighted as one of investment bank Liberum’s seven “sinful” stocks for the second consecutive year, owing to concerns over its worsening revenue and 2016 profit warning in a sector riddled with problems.
The share price gain also likely reflects the fact that Next’s online business grew twice as fast as forecast, said Wild, with sales up 11.4%.
Though Next “won’t always be able to rely on the weather,” he thinks there is “an opportunity for it to pull something out of the bag”.
“Even after this rally extended three-week gains to as much as 25%, Next shares are hardly expensive. Barely into double-digit valuation multiples, they trade at a big discount to both the sector and its own 10-year average.
“There’s also an attractive dividend yield, including at least two further promised special payouts from surplus cash.”
However, The Share Centre’s investment research analyst Helal Miah warned investors not to overlook the retailer’s “very disappointing trading update” because of the share price hike.
“Today’s big share jump is a mere consolation for investors who have held this share for a few years, as it still trades at nearly half of the level back in 2015,” cautioned Miah, “a reflection of the wider issues facing the general retail sector,” like “waning consumer confidence” and the rising cost of importing materials.
Patient shareholders will be relieved to hear that Next is sticking by its plan to divvy out four quarter special dividends of 45p each, provided profits fall within its guidance range.
Still, Miah added that The Share Centre remains “wary of the retail sector” and stressed “investors should not view today’s jump in share price as an indication of a turnaround”.
He continues to recommend Next as a ‘hold’ for medium risk investors targeting a balanced return.
