Next shares have extended their October reversal after a disappointing trading update. Poor Q3 sales growth (Retail -7.7% vs -3.7% est; Total +1.3% vs +2.9% est) and a narrowing of FY guidance (essentially a cut to the top end) have not gone down well. Directory Sales actually beat guidance, accelerating in Q3 (13.2% vs 11.4% in Q2), although this merely emphasises the threat from alternative retail channels to shops themselves.

This is quite a change from the refreshingly upbeat August and September updates/results which saw guidance raised and a confidence-inspiring share buyback announced, engineering a share price breakout to fresh 12-month highs. “Week-by-week sales volatility making it difficult to determine underlying trends” is also not the best outlook message to deliver heading into the important Q4 period. Even more so when you face a tough comparison period.

The shares are down sharply but already well off their worst levels, perhaps helped by no worsening in YTD Retail sales -7.7% and YTD Total Sales improving to -0.3% from -1.2% in Q2. Might analysts and investors have got just a little ahead of themselves in terms of consensus expectations?

Bargain hunters are seeing solace in prior 4500p resistance serving as support thus far, potentially acting as a springboard for a bounce. They also note the freshly oversold daily RSI which was the case back in mid-July before UK retail data began to improve, ushering the shares into early August’s bullish Q2 trading update and September confirmation. Bears are looking for any hint of said support being in jeopardy, potentially putting the shares back in the 3600-4500p range they traded after Jan’s profits warning.

Can things improve in Nov and Dec? Has guidance been cut to engineer a Christmas beat? Or are we headed for another warning in early Jan that sees the shares punished accordingly?

Mike van Dulken, Head of Research, 1 Nov 2017