Oil prices continue to rise, investors hide in defensive names, and Next downgrades guidance

“Brent Crude oil at $122 per barrel is going to be a tough one for businesses to stomach as energy costs go through the roof,” says Russ Mould, Investment Director at AJ Bell.

“The cost of running factories, moving trucks and powering computers will put a squeeze on profit margins which means corporate earnings expectations may have to be reduced unless we see a significant reduction in inflationary pressures.

“It isn’t all bad news as a higher oil price is good for BP and Shell on the UK stock market, thereby giving a lift to the FTSE 100 index, up 0.2% to 7,478.

“Investors appear to be in defensive mood judging by the other stocks dominating the list of FTSE 100 risers. Utilities, precious metal miners and tobacco manufacturers were bid up, with more cyclical stocks in the form of industrial miners, financials and media among the biggest fallers.”

Next

“For a company that has a habit of under-promising and over-delivering, the market has shown disappointment at Next’s downgraded sales guidance for its current financial year.

“It’s not to say the retailer is set to have a bad session; far from it. Yet Next is perhaps a victim of its own success where everyone expects it to be firing on all cylinders all the time.

“The key point of disappointment is reduced sales guidance for overseas territories, which is not simply the result of closing its Ukraine and Russian website operations. However, it has lifted guidance for likely sales from UK shops, which is a pleasant surprise given the direction of travel for UK retail – namely so much more business is going online.

“Next’s most recent full year period showed a business enjoying significant success. The company put it down to consumers splashing the cash they saved during the various Covid-related lockdowns.

“It seems inevitable the coming months may be more challenging given inflationary pressures are intensifying, and household bills are becoming much higher.

“Recent sales trends have seen consumers smarten up their appearance perhaps as more people are called back to work in the office. This dynamic could play out for a bit longer as this is arguably non-discretionary spend.

“But as we move towards summer, there is a high chance that consumers will be looking for ways to reduce their non-essential spending and so buying outfits for holidays and parties might become less frequent.

“Next’s management will be fully aware of this risk, but their focus is always on the longer term. There will always be ups and downs with sales patterns and the company has form in being able to think on its feet and move with the times.

“It benefited from having an established and efficient online operation when Covid first struck, now it is benefiting from offering a broad range of third-party products which make its website a one-stop-shop for fashion fans.

“These days more consumers accept they may not find the size they need when they walk into a store, but they can get it online and delivered to their home quickly.

“Next has been one step ahead of the crowd by making sure its website caters for as many people as possible, and that keeping a good number of its stores has provided for a convenient place to pick up items rather than the inconvenience of having to be home when a courier arrives.

“Next is a leader in the retail space and you can be sure that whatever it is doing, others will follow. It remains one step ahead of the game.”

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