Next shares surge 10% as retailer halts sales slump in the second quarter

Shares in Next jumped 10% in early trading on Thursday (3 August), after the clothing retailer recorded higher sales in the third quarter, which partly offset the ongoing decline of in store sales and a mixed outlook.

In the three months to 29 July, directory sales jumped 11.4% year-on-year, lifting total Next brand sales by 0.7% in the period, although that remained 1.2% lower than in the corresponding period last year for the 26 weeks to the end of July.

Overall sales continued to be put under pressure by the ongoing slide in Next's retail division, where sales dropped 7.4% year-on-year in the second quarter. While that was better than the 8.1% slump recorded in the previous three months, it meant the business' sales for the six-month period were 7.4% lower than 12 months ago.

The FTSE 100-listed retailer also warned the uptick in third quarter sales was largely due to warm weather, although it conceded there had been "some improvement in our product ranges and our online functionality" over the period.

Next has also narrowed its guidance for full-year sales, with the top end of the range still calling for a 0.5% gain, while the bottom end of the guidance is now a 3% decline, marginally higher than the original 3.5% drop the company expected.

Meanwhile, the guidance for pre-tax profits was left unchanged and stands between £680m and £740m.

There was better news for shareholders on the dividend front, as Next confirmed a third special dividend of 45p and hinted more could be on the way, with £307m of surplus cash expected this year, up from guidance of £255m in May.

George Salmon, equity analyst at Hargreaves Lansdown, said that while the latest trading update provided a welcome tonic to shareholders, it was clear Next was still feeling the heat.

"The UK retail sector remains under pressure, as weaker sterling raises the cost of imported textiles, and consumer spending power wanes as a result of wage growth failing to keep up with inflation," he said.

"Investors should be careful to remember that one swallow doesn't make a summer, and Next hasn't upgraded profit forecasts on the back of these numbers. Indeed, today's jump in the share price has only taken the group back to where it was in May."

Neil Wilson, senior market analyst at ETX Capital, added that while sales remained under pressure, investors were likely to be pleased by the group's ability to generate cash.

"Profit guidance is unchanged and it can cover the planned dividends with £50m to spare, which can either be used for more dividends or share buybacks," he said.

"Either way, the market likes the results and the shares are flying. Fundamentally the business remains strongly cash generative even if it's not expanding rapidly and is able to maintain solid returns to investors."