Cube Report (28 Oct 2020) – What on earth is going on?
I’m back from wedding and honeymoon. Everything is now unpacked, the house is in order, and I can knuckle down again.
But while I’ve been away, the world has gone into some sort of new meltdown.
In Ireland, there’s a Level 5 lockdown (the worst kind), planned for six weeks. It can be summarised as “most things are banned”.
London is in “Tier 2”, meaning that different households aren’t supposed to meet indoors, and the rest of the UK is subject to varying degrees of lockdown.
Oh, and there’s also a UK equity market collapse. As I type, the FTSE is down by 2% and is threatening 5600. Remarkable!
AIM is doing much better, and hasn’t yet given back much of its post-Covid gains.
I’ve been trying to make sense of events on my Twitter, and have picked up thousands of new followers who are interested in my lockdown scepticism.
I’ve also been trying to keep an eye on my portfolio – it has suffered a little in terms of valuation, but all the companies are still intact and working hard to get through this situation.
My trading account now consists of two leveraged long positions on the FTSE (using put options). Don’t worry – my leverage is limited, and I can withstand this current drawdown. I also remain short Tesla ($TSLA). I guess it’s crazy to believe that the Tesla share price will come back to something realistic any time soon, but I just can’t resist holding on to that position.
In today’s report, I’m going to take a quick look at Next (NXT), in which I have a long position.
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|Market cap||£8.3 billion|
|Writer disclosure||Long NXT|
I’ve been involved here since March 2017, buying in at £42.
The investment thesis has been based on the idea that Next could shut its physical stores, if it needed to. That idea is being fully tested now, much harder than I ever imagined!
Q3 has been pleasing:
As usual, the Online sales channel replaces the lost Retail sales.
And it’s little surprise that formal wear/occasion wear are down, as families instead focus on Home and Childrenswear.
The economic weakness can be seen in the reduction in interest income – consumers retrenching and paying down their debts, I guess? Although Next says that its credit sales did pick up in Q3, and were up 1% compared to last year. But customers had already slashed their outstanding balances during the harsh lockdown months of March, April and May.
Customers are still paying off debts faster than they did before, and so Next expects that outstanding credit balances, and therefore interest income, will remain subdued in Q4.
Obviously, the year-to-date sales figure is pretty poor, but we all understand why.
The important thing is that Next has steadied the ship, at least for now.
And despite everything that has happened, it’s still planning to earn a full-year profit this year: £365 million, a whole £65 million higher than the figure given in September as the “central scenario”.
More and more, this should be considered primarily as an online business:
With typical transparency, Next lays out the outlook for Q4. It sees a huge 20% variation in possible Q4 sales, and acknowledges “a very high degree of uncertainty in our estimates”, which depend to a very great extent on the Covid-19 situation.
In its central scenario, which involves “further local lockdowns” and some customers avoiding busy shops ahead of Christmas, Next thinks full-price sales might fall by 8%. Much also depends on warehouse operations, and whether the business is allowed to operate at full capacity.
I’m pretty comfortable with the financial outlook in all foreseen circumstances:
I don’t see any reason not to stay involved here. It continues to be run with tremendous honesty and transparency. Expectations are never allowed to run out of control, but are kept at modest levels which Next can often surpass.
Valuation is tricky, since 2020 has been such an unusual year. And who knows what 2021 might bring? But I still see Next as a winner in the retail space, capable of taking business off more short-lived rivals. This business earned after-tax net income of £600 million+ from 2015 to 2019, and I am happy to wait a few years for it to get back to those levels.
That will do it for today. See you tomorrow!