Next shares are this week’s UK Index star performer (+16%) thanks to another less gloomy outlook from management, allowing guidance to be revised higher for the second time in six weeks. This, coupled with several other observations, has helped the shares over a major hurdle which could trigger a very bullish technical pattern that sees them rally a further 10-15%.

Next had a torrid from December 2015 through to early July, dealing with slowing high street sales growth, stagnant/falling profits and intense online competition. This took the shares from highs of over 8000p to lows of 3560p via multiple profits warnings, waning sentiment and of course the Brexit referendum. Several times along the way, just when things were looking brighter, the shares did a bearish about turn only to venture even further south. For the loyal, it’s been tough to say the least.

But it all started looking better in early August when management increased full year 2018 sales guidance to be less negative: ‘-3% to +0.5%’ instead of ‘-3.5% to +0.5%’. Big deal you say, but it was a rare piece of good news that revived interest in the shares. Especially when coupled with increased guidance for cash generation (‘sales is vanity, profits is sanity, cash is reality’) that threatened higher returns for shareholders via higher dividends (3-4% yield) and/or buybacks which can support the share price.

This alone sent the shares almost 10% higher to test 4500p which had been resistance since January’s profits warning plunge. It also took the shares above their 200-day moving average for the first time since mid-December 2015, a technical signal in itself but not the one we are excited about this week.

This week’s major positives are the sales guidance being upped even more significantly to ‘-2% to +1.5%’, much better I’m sure you’ll agree. On top of this, profits are seen a touch higher too (£687-747m vs £680-740m). Again nothing huge, but moving in the right direction and it does at least increase the chance of an extra £50m in cash being generated this year, available for a share buyback that would support the shares, on top of the remaining two of four special dividends.

Where things get really exciting for the shares though are the chance that guidance may even remain conservative, setting the company up for a consensus beat that gets markets excited around full year results in March. We may even see guidance upped further at the Q3 trading statement in early November. Especially if this cooler weather prompts shoppers to invest in those more expensive heavy winter items earlier than usual.

But it’s the share price technicals that we are most interested in. Yesterday’s news sent the shares above 11-month support-turned-resistance at 4500p. This sets us up for what is known as a bullish inverse head & shoulders reversal (see chart below: left shoulder Jan- May, head May-Aug, right shoulder Aug-Sept). This could help the shares reverse a fair chunk of their late 2016 declines and rally all the way back to last September’s highs of 5700p.

Today has already seen Next shares extend yesterday’s jump. They are the best UK Index performer again today despite being a down day for the index itself. Might the shares have another 12% in the tank helped by this technical pattern, increased interest in management’s less gloomy outlook, the fact the shares are flirting with £50 again, trading a fresh 2017 highs?

Furthermore, Next shares had been among the most short sold on the UK 100 (6.1%). With many of these negative bets placed since the January profits warning, and thus below the 4500p we have broken above, they may well be at least 10% offside. The breakout may scare some of them out of their positions in the weeks to come. And with this requiring they purchase shares in the market to return them to the lender, this may merely biding the price even higher.

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As always, enjoy your weekend. I’ll see you back here Next week!

Mike van Dulken, Head of Research, 15 Sept 2017