Investec retail stock analyst’s note: Next has strong first half but Directory arm sees margin dilution – hold



Retail Times has teamed up with Investec to publish analysts’ notes on leading retail stocks. Today, Investec Securities analyst, Alistair Davies, says Next has suffered margin dilution in its DIrectory business, despite a strong first half performance, and recommends “hold”

Against lofty expectations, Next has had a stellar first half, but numbers are a little short of consensus (£5m at a PBT level) with £339m of EBIT and £324m of PBT. Within the numbers, Retail had an exceptional H1 – the strength of full price sales (+8.6%) having a key role in improving the EBIT margin by 180bps. Directory EBIT rose 10.2%, but we note a 130bps decline in the operating margin with higher levels of advertising and change in sales mix all having a dilutive EBIT margin effect. No changes to forecasts this morning. HOLD.

  • Retail execution delivered a great H1: retail sales for the half grew 7.5%, with EBIT up 22.5%, predominantly reflecting the strength of full-price sales in the year (+8.6%) and 1% lower stock being taken into sale, allowing additional operational leverage being taken from store occupancy costs (90bps)
  • Directory growth strong, but seen some margin dilution: the slight miss in the numbers we think stems from the Directory, with a lower rate of conversion of sales growth (+16%) into EBIT (+10%). This is from the sales mix with new customer recruits predominantly being cash rather than credit (generating a c.4% lower EBIT margin) and international (c. 10% of sales and a c.19% EBIT margin). Additionally, the business has moved more stock for sale onto the web, which has been dilutive to Directory but better from a brand perspective
  • Strategic priorities aimed at improving the offer: product, store improvement, UK Directory, Overseas Directory, and the label are highlighted by the company as key areas of focus to improve the NEXT proposition going forward, and a new distribution hub is to open in 2015/16 for international
  • No change to forecasts, some caution on next year: forecasts unchanged, with a slight tweak to EPS guidance due to Q2’s buyback (+1%). We note some caution in the outlook as the business laps a better trading environment, low interest rates and appetite for consumer credit in 2015. The shares trade on 17x CY15E P/E, reflecting the strength of the proposition and TSR. Hold.