Thursday preview: Next, Kingfisher, Ted Baker

23rd Mar 2011 18:06

Thursday has a fashionable look to it, with retailers Next and Ted Baker both reporting.Next will most likely be relying on its online and catalogue arm, Next Directory, to drive growth. Charles Stanley is forecasting operating profit at Next Retail will be flat at £320m, though the operating margin should improve by one-fifth of a percentage point. It thinks Next Directory will report a 22% rise in operating profit to £225m, with the operating margin expanding by two percentage points to 24%. Next Directory's total sales are expected to be up by 6% to £925m, driven by a higher number of active customers and a wider product range, Charles Stanley says."Like for like sales [at Next Retail] are expected to be down by c.4%, with trading having slowed through the year as comparatives and the consumer environment became tougher. Total sales are anticipated to be broadly flat at £2,225m, supported by the addition of new space. At the interim stage, guidance was for total space to grow by c.6% in 2010/11, with a net 19 new store openings (including 12 standalone Home stores)," the broker said.Group revenue is forecast to be £3,485m, up from £3,407m the year before, putting Charles Stanley above the market consensus of £3,464m.The market thinks profit before tax will be £550.6m, up from £505m the year before, but here Charles Stanley is below consensus with its forecast of £548m. Matrix Group, meanwhile, is even more pessimistic, going for profit before tax of £540m, right at the bottom of the company's guidance range of £540m to £555m."Sales figures have been getting worse at Next Retail, down 6.1% in the second half and down 10% in the fourth quarter," notes analyst Tom Gadsby, and while the Directory business is going well, "there is little cross over between the two parts of the business.""When poor availability in best-selling lines held back sales in Retail there was no system for backing up successful selling lines in stores, although Directory has sufficient availability. The company admits that it could have done better in terms of its buying, but the lack of focus on Retail does not encourage belief that the company is trying to grow the underlying business, new space notwithstanding," the broker added.Peel Hunt, which is going for profit before tax of £550m, reckons "Next's results will prove to be a key determinant of the retail sector's short-term direction. Chief executive officer Simon Wolfson is likely to set out a clear assessment of the current economic environment and the pressures on the retail sector.""Historically, this assessment has been so comprehensive (and negative in tone) that Next's analyst presentation has sent its own shares and the sector into reverse. However, more recently, Next has at least put forward its view on why management expects the business to outperform in such conditions," Peel Hunt continued. "We expect Next to set out a view of rising price inflation in spring/summer and then autumn/winter. The view on price elasticity is likely to be more bearish than that from Debenhams (which believes each 1% increase in price will lead to a 0.5% reduction in volumes), although we expect Next to continue to expect profit growth from Next Directory and modest space growth," the broker said.Ted Baker, like Next, has a financial year running to the end of January, to enable the January sales to be factored into its figures. The retailer lifted sales by 7.6% over the Christmas period, though this total was hit by the weather disruption. The firm does not give like-for-like comparisons, but says average retail square footage increased by 6.6% over the period to 223,623 sq.ft.The market has pencilled in pre-tax profit of £24m on sales of £186.4m. Sticking with the retail theme, do-it-yourself retailer Kingfisher's results should contain few surprises after the group issued a detailed trading update just over a month ago.Market consensus is for profit before tax of £668.4m, up from £566.0m the year before, on sales of £10.45bn, down from £10.50bn.Nomura Securities thinks the results will contain an update on current strategy as the group is in the second year of its three-year plan. "Existing opportunities for growth include space expansion in Poland and France (40-50 Brico Depot stores and Castorama extensions), while scale, through consolidation may be required, we think, in Turkey/Russia. In our view, a decision on China may take another 12-18 months, to test the long-term margin potential, despite Q4 breakeven. For new regions, we think a franchise route will be a more prudent approach, requiring limited capital allocation to new markets which could help drive ROIC [return on invested capital]," Nomura said.Matrix is another broker not expecting many surprises. "The sales figures are not especially exciting, but Kingfisher's margin management, particularly against a very promotion-driven Homebase, is commendable. We upgraded in December and again in February and our profit before tax figure of £672m should not be far off the mark, not to mention more than 20% ahead of last year's figure," reckons Matrix analyst Tom Gadsby.The broker's recommendation on the stock is "add", and it has a target price of 368p. "The bears will point to weak consumer demand in the UK, but we do not believe that this will define the UK for more than the next few months. We would highlight management's strong track record - the previous three-year targets were reached a year early; and they will no doubt be highlighting growth prospects overseas as well as part of what should be a strategic review, including the setting of new three-year targets. With management highlighting the positives and few worries over the numbers themselves we can see the shares rallying after a 6% fall in the past month and would buy into the numbers," Gadsby said. Appropriately enough, the major economic indicator due out on Thursday for the UK is for retail sales in February. 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