Next tones down its expectations for 2012

As fashion retailer Next reports Q4 results Sheridan Admans, investment research manager at The Share Centre, explains what they mean for investors.

"This morning Next released Q4 results that didn't raise any surprises. Directory sales, which were up 16% year to date, continue to drive the growth of the company and compensate for slipping sales at its retail stores. Although the retailer was surprisingly upbeat about its outlook for 2012 in November, it toned down expectations to ‘modest sales growth'. 

"Looking ahead, cotton prices have started to fall and, as a major input cost for Next, this should help to improve profit margins. Next generates reasonable levels of cash which means it is in a position to continue share buy backs and expects to do so. This, along with the way Next manages its costs, its online sales growth and its fashion range, means the retailer is highly regarded by analysts.

"There is an expectation by economists and the Bank of England that inflation should start to slip back to a lower level in the second half of 2012, partly due to the 2011 VAT increase being removed. This should help consumers make their earnings go further.

"In the longer term Next has to tackle the threat of super and hyper-markets taking market share as well as addressing the fall in sales at its high street stores.

"Although we currently see some growth left in the share price, it is not sufficient enough to warrant a ‘buy' recommendation. The share price is close to a 12 month high and, despite the potential for some relief on consumers' spending power in the later part of 2012, concerns remain over other drags on sentiment that could impact the consumer. These concerns include the continued problems in the Euro Zone, weaker unemployment numbers and the continued squeeze on consumers' ability to get credit and their desire to access credit. For now we continue to recommend investors ‘hold' Next."