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Take Primark. At the height of the lockdown every single one of its stores was shut across the UK and Europe. It had no way of selling its clothes to customers and absolutely no way of knowing when its stores would re-open. It looked like a hopeless case. As the lockdown went on and on, it seemed only a matter of time before it would have no choice but to bite the bullet, start selling online and dig itself out of the Covid-shutdown hole it was stuck in.

But it didn’t. And when stores finally re-opened, shoppers queued around the block from 5am and this week its owner, Associated British Foods (ABF), said adjusted operating profits would be at least at the top-end of its previously-issued guidance, following a strong showing in its fourth-quarter. It also revealed that in the latest four-week period, sales had hit their highest ever values and volume.

Despite at the same time warning of a significant slump in annual earnings, ABF’s ‘cheery’ outlook sent its shares shooting up to £20.82; the highest they have been since before lockdown started in March.

Compare that to Next (NXT). Caution has almost become a by-word for the fashion and homewares retailer. In July it upgraded its annual profit guidance after it experienced a lower-than-expected fall in second-quarter sales. Full-price sales for the three months to June fell 28% year-on-year, which Next described as “much better” than expected and an improvement on the best-case scenario given in its April trading statement.

Next, in typically cautious style said its 'upside' sales scenario would produce an annual profit at £330 million while its ‘downside’ scenario painted profits of just £15 million. It turns out its new baseline scenario shows it’s likely to generate profits of £195 million with annual sales down roughly a quarter. Analysts had been expecting profits of about £120 million.

Over the entire first half, full-price sales had fallen 33%, indicating an improvement in the second quarter.

With now typical Next understatement, at the end of July the company said: 'There is still much that remains uncertain and our central scenario cannot be accorded the same degree of confidence that our guidance would normally receive at this time of year.”

However, it added: “We are now more optimistic about the outlook for the full year than we were at the height of the pandemic.”

Next is right to be cautious.  Post-lockdown consumer behaviour, earnings, unemployment, and, most importantly, whether there will be a second wave lockdown, are all unknowns. And all capable of knocking the retail sector for six again, if the negatives outweigh the positives. 

But it has decent reserves of cash and says net debt should come down 40% by the end of the year, to £650 million. With those better-than-expected sales, who knows, maybe Next will even manage a smile when it posts half-year results next Thursday?

Neither Next nor Primark have, in any way, altered their business models during the pandemic. Both operate in a similar space but in very different ways. And while Primark is trying to wholeheartedly suggest it’s moving back into thriving mode, Next is still very much focused on survival.

That caution could be contagious. Morgan Stanley has downgraded its investment rating on Next to underweight, from equal weight. At the end of July it remained equal weight and had raised its price target from £34 to £36.50.

UBS is altogether more optimistic though. It rates the shares a buy and has raised its price target from £56 to £63. Credit Suisse today retains its underperform rating, but has raised its price target by £5 to £50. While Jefferies International says the shares are a hold and has raised its price target to £59 from £53.

Next shares are currently trading around £58.

More on Next PLC


(%) As at 9 Sept 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Next -25.8 -14.9 31.3 14.5 -2.4
ABF 0.5 4.9 -29.5 3.6 -15.0

Past performance is not a reliable indicator of future returns

Source: FE, total returns as at 9.9.20, in sterling terms

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

Shares; UK

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