Hobson: My Wife Said Don't Buy Next, She Was Right

THE WEEK: Morningstar columnist Rodney Hobson is unconvinced retailer Next will recover historical sales figures, and deals a blow to publishers Trinity Mirror

Rodney Hobson 6 May, 2016 | 12:20PM
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The last update from retailer Next (NXT), issued in March and covering the year to the end of January, had me thinking about buying the shares, which had come well off their 12-months high. Profits, sales and the dividend were higher yet the shares fell further.

The weather never seems to be right for clothing sales, and not just at Next

My wife dissuaded me from buying. I’m now convinced she was right, despite a surge in the share price this week that defied logic as well as gravity.

Total sales for the period from January 31 to Monday May 2 were down -0.2%, with full price sales down -0.9%. This kept Next just inside its predicted worst case scenario of minus 1% and left the best case shot of 4% growth looking wildly optimistic.

The fall would have been worse but for an extra 1.6% from additional space and a recovery in Next Directory, which had previously suffered from stock shortages. So the shops are struggling, especially in clothing.

Much colder weather in March and April reduced demand for summer clothing, particularly over the Easter holiday period, which was unusually warm last year. The weather never seems to be right for clothing sales, and not just at Next.

Next thinks it is unlikely that sales will deteriorate further, and there has been a pick-up in recent days, but it admits that “the poor performance of the last six weeks may be indicative of weaker underlying demand for clothing and a potentially wider slow-down in consumer spending”.

An indication of its lack of confidence is a lowering of the bottom end of its guidance for the full year. Sales will drop 3.5% over the 12 months if trading continues as it has been for the past six weeks.

Shares added 272p on the day of the results and another 130p to 5280p the following day. I viewed the update as a profit warning. As long as I am out of step with the stock market’s view of Next, I will stay well clear of the shares.

Should You Sell in May?

We seem to get through the first third of the year faster each time and once again we have reached the point where some “expert” or another is extolling the old motto “Sell in May”. Regular followers of this column know I am scornful of what I consider to be bad advice.

You can make statistics prove pretty much anything but, try as I may, I have singularly failed to find any that indicate that quitting the market for the next three months is likely to work well rather than badly.

The FTSE 100 Index has already come off April’s highs and confounded my hopes that it would hold above 6,200 points. If you are going to get out and put your head in the sand, you are already a month too late. All you achieve by selling is to lose three months of dividends.

This year the EU referendum could muddy the waters but, depending on the outcome, it could boost shares as much as depress them. I shall continue to invest regardless of any mindless cliché. As always, it is better to invest your ISA allowance as soon in the financial year as you can afford it.

Publisher Should Have Known Better

Trinity Mirror (TNI) employees losing their jobs with the closure of the New Day newspaper probably took a rueful look at the soaring share price as the press group bowed to the inevitable.

The shares promptly jumped 10p to 123p as investors welcomed news that Trinity would stop pumping money into a bottomless pit. The miracle is not that reality dawned so quickly but that staff got paid for two months for flogging a dead horse. There was never any genuine hope that commuters would pay 50p for a bland newspaper when they could get the superior Metro free.

This is not being wise after the event. The judgement of those in charge of Trinity Mirror must seriously be called into question. I would not buy shares in a company that could make such a blindingly obvious mistake. Bringing it to an end so quickly does not excuse blundering so badly in the first place.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Next PLC6,130.00 GBX-0.26
Reach PLC120.00 GBX0.59

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.