Next (LON: NXT) shares have dropped 6% in London off the back of the annual report. All of which seems a little odd as there are record earnings per share, sales are 8% and change and so on. So, why the fall back in the share price? One argument could be that people are starting to figure inflation into the corporate numbers we're being presented with. Once we do that an 8% rise is, in fact, a fall in real sales.
The problems in Next's results come from closer examination. For example “In the midst of a consumer squeeze, trading sales were up +8.4% on last year. (Excluding the weeks that were flattered by lockdown in the previous year, trading sales were up +4.8%). “ That problem being that inflation was up some 10% over the year. This means that real sales - sales adjusted for inflation - were down, not up. That's not a good sign. We can then play around with the clothing inflation rate (yes, this is a real number calculated) and readjust again. Profit increased by 5.7%. That's less than any reasonably applicable inflation rate. This is something that is rarely done - we've not had considerable inflation for decades now - but it is something that has to be considered.
Next share price from
What will also be influencing the price here is the forecast for coming year profits, forecasting sales to be down 1.5% and profit before tax down 8.7%. Now., they also say that they expect inflation to be very much lower in this trading year (to Jan 2024) which is almost certainly will be. But that is again evidence of a shrinking company, not a growing one. In this year just reporting, nominal growth and real shrinkage, in the next one likely both nominal and real falls in sales and profits. The story management is telling us is that Next simply isn't a growth stock.
That then has obvious knock on effects upon the corporate valuation. The value of any one instrument today is the net present value of all future income from that instrument. If there's going to be not just no growth but an actual fall in revenues and profits then clearly the shares are worth less.
