Morning Note: Market news and an update from retailer Next.
Market News
The focus remains on the outlook for rates – the minutes of the Federal Reserve December meeting showed officials agreed that rates would remain restrictive “for some time” while acknowledging they’d probably peaked, and cuts would begin this year. The 10-year Treasury yield remains below 4%, while gold has moved back up to $2,047 an ounce.
The Fed is trying to find the right time to start deliberations on how it will extract itself from its balance-sheet unwind, according to the December minutes, a sign the end of quantitative tightening (QT) might be closer than previously thought. Its plans indicate it will wait until reserve balances are “somewhat above the level judged consistent with ample reserves.”
US equity markets closed lower for a second day last night – S&P 500 (-0.8%); Nasdaq (-1.2%) – weighed by rate-sensitive mega-cap stocks. This morning in Asia, markets were also lower: Nikkei 225 (-0.5%); Hang Seng (flat); Shanghai Composite (-0.4%). China’s December Caixin PMI services expanded at its quickest pace in 5 months. However, the nation’s government bond yields fell to the lowest in more than three years.
UK businesses are keeping investments plans on ice because of high debt-servicing costs and a stagnant economy, a British Chambers of Commerce survey found. It said that will be the economy’s “Achilles’ heel,” with firms reluctant to boost spending plans despite government tax breaks. Sterling trades at $1.2690 and €1.1590, while the FTSE 100 is currently trading 0.3% higher at 7,708.
The oil price jumped by more than 3% yesterday as supply disruptions in Libya and attacks in the Middle East ratcheted up tensions in the region. Brent currently trades at $79 a barrel. Meanwhile Saudi Aramco has sent notices of price changes to some companies.
Source: Bloomberg
Company News
Retailer Next has this morning released a trading update for the nine weeks to 30 December which highlights that sales during November and December were better than anticipated. In response, the group has raised its guidance for the financial year to end January 2024, pushing the shares up by 4% in early trading this morning.
During the period, full-price sales were up 5.7% versus last year, £38m better than the group’s previous guidance of 2.0% growth for the period. Note that full price sales are VAT exclusive sales of items sold at ‘full price’ in Retail and Online plus NEXT Finance interest income. They exclude items sold in sale events, clearance operations and through Total Platform. By channel, Online grew by 9.1%, while Retail was up 0.6%. The group believes that strong Online performance was because of service improvements versus last year.
Stock has been well controlled – the group went into the end-of-season sale with 12% less surplus stock than last year. The group expects clearance rates over the life of the sale to be broadly in line with last year.
The group has also increased its full-year profit before tax guidance by £20m to £905m, up 4.0% versus last year. Of the £20m increase, £17m came from the sales beat to date and £3m comes from an upgraded forecast for full-price sales in January. Earnings per share is now expected to come in at 569.9p, versus the previous guidance of 557.7p, a 2.2% upgrade.
Cash generation has remained strong, with c. £100m more surplus cash than the previous guidance given in September. This means net debt (excluding lease liabilities) will be around £700m at the January year-end, compared to £797m in the prior year.
Looking forward, the group believes that, on the face of it, the consumer environment looks more benign than it has for a number of years, albeit there are some significant uncertainties. Against this backdrop, full-price sales are expected to grow by 2.5%. In setting its guidance, the group has considered both positive factors (wages rising faster than prices and zero inflation in its selling prices) and risks (weakening employment market, mortgage rates, and supply chain risks). The largest cost increase this year will be wage inflation, which the group expects to be around £60m. Within this, around £25m is the difference between the expected rate of general UK wage inflation, and the rise in the National Living Wage. As a result, is guiding to PBT growth of 5.0% to c. £960m.
The group expects to generate £600m of cash. After paying ordinary dividends and completing planned share buybacks, the group intends to retain the remaining £75m of surplus cash, further reducing net debt.
Although there is much uncertainty surrounding the outlook for consumer spending, today’s update once again highlights the group’s strong franchise and management team.
Source: Bloomberg