Next more likely to suit now it's recovered from fashion faux pas

Pilkington's prospects remain too opaque; Duty-free drinks give Alpha Airports a rosier look

NEXT IS one of the more dependable high street retailers. It has a wobble now and then, normally when it tries to be too trendy. But it usually bounces back. Its most recent fashion faux pas was last autumn when the cut of some garments was too tight and it paid too little attention to mid-price ranges. Sales fell but the group has been addressing the mistakes.

Next is one of the more dependable high street retailers. It has a wobble now and then, normally when it tries to be too trendy. But it usually bounces back. Its most recent fashion faux pas was last autumn when the cut of some garments was too tight and it paid too little attention to mid-price ranges. Sales fell but the group has been addressing the mistakes.

So while like-for-like sales at full price (which ignore new stores, extra in-store space and discount sales) were down 3.1 per cent in October, this improved to minus 0.8 per cent in December and flat in March.

Next is now trying to move attention away from like-for-like sales growth in its high street stores, preferring instead operating profits. These will grow because of more Next Directory customers and, most importantly, store expansion.

A big push will give Next 400,000 square feet of extra selling space this year, including 20 new stores. This will obviously grow the business but it does carry quite a bit of risk. Firstly it reduces like-for-like sales in the remaining chain by two percentage points. Secondly it means the company is, in effect, "buying growth" and begs the question what happens when the store expansion wanes. This is why the City sets so much store by like-for-like sales in the first place.

For now, though, things are clearly on course. Profits from the Next Directory jumped to £65m in the year to 1 February, compared with £49m the year before. Sales at the division were up a thumping 30 per cent and this unsung hero now accounts for 20 per cent of the group. And the group's share buybacks alone will increase earnings per share by 5 per cent this year.

It is also worth pointing out that while Next's shares have seen some major peaks and troughs over the past five years, the company has delivered steady earnings growth. This was 18 per cent last year – a figure most FTSE 100 companies would kill for – and was achieved in a year when Next got the autumn fashion season wrong. Earnings are 86 per cent higher than five years ago. Assuming full-year profits of £316m, the shares, up 26p to 835p yesterday, trade on an undemanding forward price-earnings multiple of 11. Backed by a 4 per cent yield, they are a solid hold.

Pilkington's prospects remain too opaque

Is there going to be a dividend cut at Pilkington, the renowned glass maker?

This was the question we last asked in September, when the stock had a prospective yield of 8 per cent that signalled the market clearly thought it would have to slash the payout. It was not an unreasonable assumption from investors, who noted, ruefully, Pilkington's appalling record in generating cash and the dire trading conditions in the glass market.

But Stuart Chambers, the chief executive, promised to move heaven and earth to maintain the payout and, as time goes on, confidence is growing that he can succeed. A trading update yesterday surprised the sceptics, showing that Mr Chambers has been able to wring more cash than expected out of Pilkington's businesses and make inroads into the group's £900m debt mountain. Years of painful restructuring are starting to pay off but that size of debt will continue to limit its room for manoeuvre for years to come. There are also worries that the group may have to top up pension funds in the US and Germany.

Mr Chambers is not getting any help from the global economy either. Commercial construction activity is still sluggish in the US and Continental Europe, and that means less demand for glass. Only the UK, where regulation is forcing customers to use Pilkington's energy efficient glass, has so far remained buoyant.

There was better news in automotive glass, with Pilkington being designed into some new models and a robust market for replacement windscreens. But car manufacturing could come under pressure if consumer confidence falters.

So it is too early to feel confident about Pilkington's recovery, though the shares rose 6 per cent to 52.75p yesterday. Even at best, profits will be flat in the coming year. Investors need not rush while the economic future is seen only through a glass darkly.

Duty-free drinks give Alpha Airports a rosier look

The rise and rise of the low-cost airlines has shaken up all sorts of connected industries. Alpha Airports, which used to make a living supplying in-flight meals in bulk to the likes of British Airways, has had to adjust to a less cosy world, where aeroplane food is more likely to be bought by the passenger off a no-frills trolley.

The group has two sides to its business, with in-flight meals bolstered by a second business in duty-free retailing at regional airports. Some of what it has lost as full-service airlines retrench, it has gained from increased passenger numbers at these airports (predominantly used by no-frills airlines) and on sales from trolleys on easyJet and Ryanair.

Unfortunately, retailing has margins of 4 or 5 per cent, against full-service catering margins of 6 to 9 per cent so, net, things are getting tougher for Alpha. The 900 job cuts made in a restructuring after the 11 September attacks has improved matters, though, and profits, before tax and one-offs, were up 15 per cent in the year to 31 January.

It is making other refinements to the business model, and next week takes over "in-flight service management" for BA CitiExpress, taking on the running of other food and drink suppliers as well as continuing to provide its own meals. It is also spending money to develop an internet service offering pre-bookable meals to no-frills passengers.

So Alpha is making progress and should prosper in the medium term. At 59.5p, hold.