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Advice - Buying struggling companies: Next PLC
#1
Hi all,

I just wanted to ask others experiences of buying struggling companies.

I first bought into Next PLC (a UK clothing retailer) at £68 a share (too expensive admittedly), then again at £51, again at £48 and again at £44.

After lowering guidance yesterday shares are down to £41.

Now I love this company - it has superior margins (20% net profit margin) over its competitors and robust free cash flow.

The only problem? - Sales are falling! With profit before tax down 3.6% this year and EPS down 0.6%

Free cashflow is also down to around £360mn from around £500mn the year before (after investing more in its online offering)

The company is blaming the fall in the pound for increased costs and thus the need to increase its prices by 5% and Brexit for knocking consumer confidence and spending.

This trend will almost certainly continue into next year and analysts (for what their word is worth) are saying that there will likely be further downward estimates in Sales, Profit and Cashflow.

The worst thing - the company has stopped buying back its own shares!
Next has a long history of buying back shares with it's spare cash at under £68 but the management has now said it will pay out spare cash in special dividends.

So I'm left with a tough choice: Buy more or just hold.

I'm already at 120% of a position and I have to admit I'm hesitant to add more because I'm just not comfortable but this price just seems too good.

Do I continue to believe in this struggling retailer or are my rose tinted glasses as a shareowner blinding me from the fact that maybe people just don't like buying clothes from Next anymore?

Lewys
FrugalStudent
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#2
If you are trying to catch a falling knife, maybe you should stop Wink

Logics suggests that you wait until it stops falling, and then, likely there'll be period of support, and buy some more on the way up.
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#3
Normally I'd say if you're confident it is a quality business, keep on adding, but this is a clothing retailer in a changing world. I'd say keep your 120% position and focus your new capital on something that is actually performing well.
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#4
Yeah I think you guys are right.

I'm confident that the business will bounce back but there are other appealing investments out there at present that I don't have a full position in yet.

There's no point continuing going overweight with retail.

The dividend isn't going anywhere and is well covered so I'll take the cash for now and invest it in to something that is performing well.

This is the first time this has happened to me - I usually just keep buying more and things turn out fine.

I think this knife cut me somewhat! - Yet, my portfolio is performing magnificently, the beauty of diversification Smile!
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#5
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#6
(01-05-2017, 11:47 AM)DividendDragon Wrote: Hi all,

I just wanted to ask others experiences of buying struggling companies.

I first bought into Next PLC (a UK clothing retailer) at £68 a share (too expensive admittedly), then again at £51, again at £48 and again at £44.

After lowering guidance yesterday shares are down to £41.

Now I love this company - it has superior margins (20% net profit margin) over its competitors and robust free cash flow.

The only problem? - Sales are falling! With profit before tax down 3.6% this year and EPS down 0.6%

Free cashflow is also down to around £360mn from around £500mn the year before (after investing more in its online offering)

The company is blaming the fall in the pound for increased costs and thus the need to increase its prices by 5% and Brexit for knocking consumer confidence and spending.

This trend will almost certainly continue into next year and analysts (for what their word is worth) are saying that there will likely be further downward estimates in Sales, Profit and Cashflow.

The worst thing - the company has stopped buying back its own shares!
Next has a long history of buying back shares with it's spare cash at under £68 but the management has now said it will pay out spare cash in special dividends.

So I'm left with a tough choice: Buy more or just hold.

I'm already at 120% of a position and I have to admit I'm hesitant to add more because I'm just not comfortable but this price just seems too good.

Do I continue to believe in this struggling retailer or are my rose tinted glasses as a shareowner blinding me from the fact that maybe people just don't like buying clothes from Next anymore?

Lewys
FrugalStudent

Downward sale, profits and cash flow projections on a company that is already down 30%?
I'd be gone like a turkey through the corn!
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