Is Next plc's 40% share price slump set to continue?

Updated: 
Next clothes shop

Shares in FTSE 100 clothing retailer Next(LSE: NXT) jumped over 9% this morning, as the company released its annual results to the market. Does this mark a turning point in sentiment or will the £5.7bn cap's popularity with both consumers and investors continue to wane? Let's check out those key numbers.

"A challenging year"

Today's jump is certainly impressive when you consider just how lacklustre recent performance has been.

For the 52 weeks to the end of January, retail sales declined by just under 3% to £2.3bn, leading to a 15.8% fall in profits to £338.7m. While this was compensated for by decent growth in Directory sales (rises of 4.2% and 9.6% in sales and profits respectively), total sales remained flat at almost £4.1bn. Overall, underlying profits before tax dipped by 3.8% to just over £790m with earnings per share at 441.3p hardly budging from the figure achieved a year before. The dividend of 158p per share was maintained.  

Next blamed the annual fall in profits -- its first decline for eight years -- on a change in consumer spending away from clothing, following the weakness of sterling. Objectives for 2017 included upgrading its Directory, rolling out its overseas mobile site and opening new retail space.

With a price-to-earnings (P/E) ratio under 10, a strong balance sheet and a history of generating consistently high returns on capital, I'm beginning to wonder if we've seen the end of Next's share price woes -- it was down over 40% over the last 12 months before today, but is now 'only' around 38% lower.

While the company faces a difficult year ahead as a result of rising inflation and lower wage growth impacting on consumer demand, I suspect that the market's drastically reduced expectations now make Next an appealing option for investors looking for value. An enticing 4% yield should also interest income chasers, particularly as this is four times better than that offered by the best available instant access cash ISA.

Those looking for fast-growing companies, however, may wish to look to one of Next's industry peers.

Better prospects?

In sharp contrast to those of Next, annual results from lifestyle brand Ted Baker(LSE: TED) make for far more pleasant reading.

Over the twelve months to the end of January, the £1.25bn market cap company achieved a 10.8% rise in group revenue to £531m once exchange rate fluctuations are removed. Retail sales climbed 9.2% to just over £400m, thanks in part to particularly strong performance in the US and Canada (up 13% to 103.4m). The business also saw excellent trading online, with sales rocketing 32.3% to £72.3m. Pre-tax profits rose 4.4% to £61.3m.

Commenting on results, founder and CEO Ray Kelvin reflected that the company had continued to perform "despite a backdrop of on-going external challenges" and that management had a "clear strategy for continued growth across both established and newer markets". This upbeat forecast couldn't be more different to the "extremely cautious" outlook projected by management at Next. 

So far this morning, shares in Ted Baker are down over 4%. After rising 33% since last year's shock EU referendum result, however, some profit taking was perhaps inevitable.

Despite this dip, a forecast P/E of 22 means the company remains an expensive choice. Despite increasing its total dividend for the year by 12.1% to 53.6p per share, a forecast 2.2% yield is also much less than that offered by its troubled competitor. Nevertheless, with its plans to continue expanding rapidly overseas, Ted Baker would be my preferred pick. 

And if neither appeal?

Of course, investing in companies operating in the fickle fashion industry isn't for everyone. If you're on the look out for businesses that have shown an ability to increase earnings regardless of the economic outlook or consumer sentiment, you really should read a special report from the analysts at the Motley Fool. They've picked out 5 shares they believe you can hold until retirement (and beyond).

To find out the identity of these super stocks, just click here. Their report is completely FREE to download and keep.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Ted Baker plc. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.