This week’s UK 100 winner is retailer Next (NXT), its shares putting on a whopping 6.8% to deliver a bullish break from a 2-month sideways channel (£38-£40). This helped them outperform blue-chip peers by more than 3% in a week in which the index itself fell over 1% from record highs. What has investors excited in shares down 50% in just over a year? Does this week represent a turning point for Next or was this merely short-term bargaining hunting within an ugly downtrend?

Yesterday’s full year 2016 results. Unchanged profits guidance more specifically. The  share price reaction suggests faith in reiteration of management’s profit targets, offsetting a rather cautious outlook statement and last year’s pre-tax profits coming in a shade below consensus. A flat dividend likely helps too, but cutting/reducing income from shares is the last thing management wants to do when trying to keep investors onside.

Better than expected 4.2% sales growth for Next Directory suggests life in the old trading model that made Next such a high street success in years gone by, and the model continues to work well alongside the increasingly important online avenue. This helped counter a 2.9% fall in Next Retail to keep Group Sales at least flat for the year. Perhaps the change in Chairman is also seen as fresh eyes for a turnaround.

On the flipside, the company acknowledges shoppers devoting more attention to non-retail, hurting profitability which fell 15.8% in Retail, impossible to overcome even with growth of 9.6% in Directory. Group profits thus fell 2.8% meaning ugly margin contraction. Next continues to fight quicker response fashion from the likes of Zara (Inditex) and ASOS, and aggressive discount offering from the likes of Primark. A Brexit-weakened pound sterling also means unwelcome inflationary pressure by way of higher input costs, compounding existing competition issues and brand maturity.

After a poor Christmas statement that saw the shares give up almost 20% in two sessions in early Jan, this week’s reiteration of 2017 guidance suggests investors clearly hoping that things can only get better.

The shares may be off their best levels, having been +8% at one point, helping drag apparel retail peers like Marks & Spencer (MKS) and Associated British Foods (ABF) higher on the same day that we saw a strong rebound in February UK retail sales suggesting the UK consumer is back after a tough recent few months. However, with MKS and ABF only up around 1% for the week, this implies optimism in the worst being behind Next, as opposed to outright optimism in the UK retail sector as a whole.

Since the results, most brokers have maintained a neutral stance. Perhaps wanting more proof that reiterated guidance targets can be met. If they can, a neutral biased consensus offers potential for upgrades, if this proves an inflection point for the company. Investment bank UBS, which says Buy, may have cut its target to £49/share from £51 due to the tough outlook from management, but this still represents 19% upside from current levels. Might the significant 70% of fence-sitting analysts with neutral ratings need to revisit their models, ratings and targets? Could this fuel further upside for the shares?

Technically we spy a bullish break above £40 to escape the sideways channel and the 50-day moving average at £39. While the latter is significant, having traded well below the indicator since early January’s slump, the former is even more as the prior £40 resistance should now turn supportive for any pullback. The shares have yet to clear a 13-month trend of falling highs resistance at £45, but any further good news (UK March retail Sale figures? Stronger GBP? Broker upgrades) could help the shares go on to challenge this. Even if it can’t be cleared, there is still 10% upside on offer. For the doomsayers, there is over 9% downside to recent lows of £38 if you fancy trading the shares Short.

Having read this far (I thank you!), this type of analysis is what myself and my Accendo colleagues do all week. To assist you in understanding why share prices and markets are moving. If you like what you’ve read, why not join our regular readers and sign up for it permanently.

As always, have a great weekend,

Mike van Dulken, Head of Research, 24 Mar 2017