Good morning! It's Paul here.
Both Graham and I will be working today. Graham will be emailing me his sections, which I'll include in this single report, marked clearly as being written by him.
Retail sales volumes
Over the weekend, I was looking at some data, showing that the latest retail sales volumes have apparently fallen about 2%. This seems to have cast a cloud over consumer spending related shares.
However, the way I see things, consumers only have a certain amount of money to spend. Therefore, when inflation starts rising, as it is now (due to the fall in sterling), then one would expect consumers to continue spending roughly the same amount. However, that amount will actually buy a smaller quantity of more expensive items.
From the retailer's point of view, this shouldn't really matter very much. In such a situation, LFL sales would simply be flat. Fewer items are being sold, but the prices have gone up, so the retailer ends up achieving the same overall sales figure. Moreover, with lower volumes of goods being sold (at higher prices), the retailer will actually achieve some cost savings - e.g. fewer plastic bags being used, savings on staff rotas, warehouse costs, etc.
(at the time of writing, I hold a long position in this share)
Next puts out the most detailed forward guidance in the sector, and its guidance for 2017 is extraordinarily pessimistic. Its central guidance for LFL sales is minus 7%. Now bear in mind this is after the company will have raised selling prices by 4-5%, then this means that Next is forecasting a massive drop in sales volumes of something like 12%. That doesn't seem very likely to me.
At just over £40 per share, Next seems a remarkable value opportunity to me. The Directory business is now more profitable than the stores, so it's effectively a growing, internet-based business. Yet strangely, the market is ignoring this, and treating the entire business as if it's a declining, old economy business.
Including pre-announced special divis (covered by cashflow generation), the dividend yield is now approximately 7-8%. The forward PER is about 10, but that's based on really pessimistic forecasts. The company has a history of starting the year with very gloomy forecasts, and then pleasantly surprising later in the year.
It will be fascinating to see how this year pans out. To me though, the current…