Next warns of a bumpy run-up to Christmas

Next, with 490 stores and its ever-successful Next Directory catalogue, showed a distinct improvement in trading between its first half-year to the end of July and the 18 weeks to the start of this month. But the group, led by chief executive Simon Wolfson, made it clear current trading is distinctly patchy, and Christmas remains anyone's call.

Within the past 14 weeks, the last eight were much better than the first six with like-for-like High Street salesmoving from a fall of 4.8% to one of 2.9%. Directory went from a 2.9% drop to a 1.2% rise.

But the group warned: "Trading patterns remain extremely volatile with good sales in September giving way to a disappointing October."

One analyst said: "Within the overall figures, there appear to have been huge swings with like-for-like sales in the stores up by high single-digit percentages some weeks and down by highteens percentages in others. Next believes it is not just been the weather that has caused these swings, but is a sign of just how fragile the consumer market place really is."

Next's management claims it has really started to get things right with better fashions and better clothes quality, a refurbishment programme that has now reached about half the stores, and a revitalised advertising campaign.

It said: "While we are happy that we have made significant improvements in our product ranges, marketing and stores, we remain cautious about the consumer environment, with many customers now experiencing considerable year-on-year increases in their mortgage repayments."

With three months to go until the end of its financial year, Next said it was sticking with its forecast that store sales for the full year will be down by between 1% and 3.5% but it took a slightly improved view on the Directory, saying sales would be between 0% and 2% better. It had previously forecast Directory sales in a range of minus 2% to plus 2%.

Using those forecasts, the group said it still expects to hit market forecasts for profits with the average among analysts being a modest rise from last year's £478 million to about £490 million.

Next's caution was mirrored by the latest consumer confidence survey from Britain's biggest building society, Nationwide.

While overall confidence was only one point down in October from September, the Spending Index, which shows consumers' willingness to put their hands in their pockets, plummeted by eight points. That took it down to just 77, the lowest it has been since the High Street's last unhappy Christmas in December 2006.

Next shares today advanced by 8p to 2060p.

Numis analysts note

Next (Reduce): Trading statement

Current share price: 2052p

Target price: 1725p

Market capitalisation: £4263m

Last diff recommendation: Hold, 25 July 2007

The numbers reported this morning highlight an improvement on those reported at the six week stage. Nevertheless, performance is behind that of M&S, which highlighted yesterday that it was gaining market share in a difficult market.

Retail: Having delivered LFLs of -4.8% for the six weeks to 8 September, LFLs have improved to -1.2% for the 14 weeks to 3 November 2007. This is within the company's target range of -3.5% to -1.0% for H2, highlighted at the time of the interims.
Directory: After several years of mid-teen growth, Directory delivered sales growth of +3.5% for H1 and -2.9% for the first six weeks of H2. This has improved to +1.2% for the 14 week period, giving the company confidence to tweak its target range of growth to 0% to +2.0% for H2.
Forecasts: We are keeping our forecasts unchanged, as after a good September, October was disappointing. Our PBT forecast for the year to January 2008 remains unchanged at £467.5m. This is below consensus forecasts which are largely clustered around the £480-490m range. The difference will be in that consensus is looking for another boost at the margin level. We however, remains cautious on the outlook for sales.
Valuation: With EPS supported by the share buy-back programme, Next is currently trading on 12.8x Dec 08 earnings, which is bang in line with the clothing sector. We however remain cautious given the deteriorating top line and maintain our target price at 1725p. This equates to 10.6x Dec 08 earnings and 6.3x Dec 08 EV/EBITDA.