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Next - damn that hot weather!

By Chris Bailey | Wednesday 1 August 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Even a fashion luddite like me knows that clothing retail works best when you have a clear and distinct winter and summer period. The fashionistas and general public alike buy to look on-trend and functional as the temperatures respectively plummet or rise. In that vein then, the recent bout of extended hot weather was a retail bullseye - assuming, of course, that you have sufficient online capability to be active where increasingly the action is.

Online has never been a problem for Next (NXT), who so successfully morphed from its Directory business to a pukka online operation that was the gold standard for many an aspiring clothing fashion name. So today's trading update should be full of good cheer then given the distinct seasons?

Well to an extent it is, with comments such as 'full price sales in the second quarter were up +2.8% on last year and ahead of our guidance'. Back of the net! Later in the statement it also observed that 'clearance rates to date are better than expected and have added approximately £4m to profit' and 'our cash flow remains strong and we still expect to generate around £300m of surplus cash after deducting interest, tax, capital expenditure and ordinary dividends'. Smell a further share buyback then to supplement the already near 4% dividend yield. However...selective quotes from a trading update can be a little bit deceptive. Remember those above guidance sales levels? Well the worry is that:

'this over‐achievement in sales was due to the prolonged period of exceptionally warm weather, which greatly assisted the sales of summer weight product. It is almost certain that some of these sales have been pulled forward from August, so we are maintaining our sales and profit guidance for the year to January 2019'

Even Next cannot magic even more sales than it would have sensibly expected from summer-loving consumers. This and an acknowledgement later in the statement that those clearance extra profits were offset by higher warehouse/distribution costs, meant that the results were a bit old reiteration of expectations.

Now this is no disaster...but Mr Market had already revved up Next shares from the dog days when I was imploring you to buy them for less than 40 quid, which is why they are down 6% as I write to £56. Next is so much more than a survivor but it does not walk on water and the rule of buying core retailers in 2018 is when they are out-of-favour. I had fun a year or so ago buying Next sub 40 quid and off-loading at 50. Today the old resistance has become the new support and I would snaffle them back - ceteris paribus - at about £50 but not now, even though it is promising you bank-busting rates of shareholder remuneration. You know the risks by now of course: too much sun too quick...or the return of the proper winter chill too slowly.

I wonder if fashionistas are into meteorology?

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