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Next Outperforming in a Struggling Sector

The Week: Morningstar columnist Rodney Hobson notes Next's strong share price rise this year and says investors should be cautious

Rodney Hobson 20 September, 2019 | 10:57AM

Next

Clothing and homewares retailer Next (NXT) was widely praised for its clear and comprehensive reporting of its performance in the six months to July. The figures weren’t bad either, given the parlous state of the High Street and the highly competitive nature of retailing.

Retail sales were admittedly down 5.5% but that was more than offset by a 12.6% jump online, where revenue topped £1 billion to easily outstrip the shops. More starkly, online profits are now three times as great as those from the shops, such are the benefits of not having to carry the cost of bricks and mortar or paying staff whether customers need attention or not.

Pre-tax profits increased 2.7%, not sensational in itself but pretty stunning for the sector. The well-covered dividend is raised 4.5%.

The shares slumped nearly 6% on the figures but shareholders should not feel too aggrieved. Next has gained nearly 50% since the start of this year as it has prospered while closest rival Marks & Spencer (MKS) continues to suffer. If Marks persists with its push into food at the expense of clothing and homewares, Next will find the competition is growing a little less intense.

It’s hard to recommend the shares at this high level unless they fall back further but existing shareholders have no reason to take profits yet.

Cling On to Pendragon 

Several times during the boom years for UK car production I considered recommending dealer Pendragon (PDG) as a way of cashing in on this success story. Each time, though, I felt that all the good news was already factored into the share price and I missed the best opportunities to buy.

Now this looks like a piece of good fortune (or good judgement, if you prefer). The collapse of the car market – whether you blame it on the demonisation of diesel, waiting for more efficient electric cars or the Brexit limbo – has left Pendragon shares below 10p. They were worth three times as much as recently as March.

The chairman is stepping down at the end of this month and, as the chief executive has already gone, non-executive director Bill Berman will run the business as executive chairman until replacements can be appointed. It’s not a satisfactory arrangement.

Not surprisingly, the dividend has been scrapped and it would take a brave investor to forecast when it will be restored. And yet there will come a point when drivers who have postponed buying new vehicles will have to bite the bullet. If Pendragon can cling on – and I believe it will – then one day it will bounce back. Perhaps all the bad news is now in the price. I just wouldn’t bet on it.

Sobering Up

What on earth should one make of the trading update from drinks group Diageo (DGE)? It read as if the writer was a little confused after sampling the products, perhaps in the same way that whoever dreamt up the daft name for the company some years back had.

The current financial year has, the statement says, started well, building on the momentum and consistent progress of the company’s strategy. Pass the Smirnoff. It might help to drum up phrases such as quality sustainable growth, a culture of everyday efficiency and investing smartly in marketing and growth initiative.

After that euphoria, it comes as a bit of a disappointment to discover that growth will be only at the mid-point of the 4-6% target range and organic operating profit could be slightly below that.

The real wet blanket, though, is this final sentence: “However, we would not be immune from significant changes to global trade policy and continue to monitor this closely."

Is that a veiled profit warning? Are there already signs of an impact? I’d like a lot more sober clarity on that before I considered investing.

 

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.

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.

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