Next shares look to stand ground after profit warning

Next (LSE: NXT) shares looked to shrug off a profit warning from the retailer this morning, with the group revealing that the exceptionally mild autumn has led to reduced demand for its winter clothing.

In a third-quarter trading update, Next says it now expects full-year 2014 profits to range between £750m and £790m, down from the £775m to £815m it had previously indicated. Sales for the three months to 25 October rose 5.4%, slower than the 10% growth expected.

Having already indicated in a trading statement last month that profits might suffer if the unusually warm weather continued, it is no surprise the shares did not suffer too much today. Midday they were off 40p or 0.6% to 6,395p.

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While investors will be disappointed by the warning today, at least they were warned well in advance.

And while companies blaming the weather for poor performance is often on par with rail companies blaming cancellations on the wrong type of snow or such like, it is difficult to be too critical of Next. It has a very good record of giving advance warning of any serious concerns it may have that might impact its results.

Analysts cut Next forecasts

Analysts are now expected to shave their earnings forecast for its year ending January 2015 by around two to 3%. Charles Stanley, for instance, has cut its own earnings per share (EPS) estimate 2% to the mid point of the new guidance, 414p.

At 6,395p, the share price implies a forward 2015 multiple of 15.4. That is a slight premium to the general sector and looks justified considering Next's track record of delivering and pretty decent prospects going forward. The prospective yield is a reasonable 2.3, covered a healthy 2.8 times.

Commenting on the results, Charles Stanley analyst Sam Hart says, "We expect trading conditions in the UK general retail sector to remain challenging over the medium term, with the consumer environment likely to stay relatively subdued and the competitive landscape intense."

But Hart believes Next's strong ranges and the high quality of its online proposition means the company can continue to make good progress. "We forecast further healthy progression in pre-tax profits over the medium term."

He adds: "Strong free cash flow generation raises the prospect of further share buybacks and/or special dividends going forward. The vagaries of the British weather will inevitably continue to influence short-term trading performance, but good medium to longer term prospects for the company remain unchanged."