How Are These Two Blue-Chip Stocks Responding to the Latest Business Updates: Barclays PLC and Next PLC?

London markets surged for a third consecutive day on Wednesday (29^th April 2020, before the market close), with optimism over reopening of business activities than being depressed over gloomy first-quarter results. The blue-chip stocks were hovering near a seven-week high. Today, we will discuss two blue-chip stocks - Barclays PLC (BARC) and Next PLC (NXT). Both companies have released their trading updates today (29^th April 2020). Subsequently, the price of BARC zoomed up significantly by around 8.03 per cent and NXT was down by over 2.28 per cent (at the time of writing, GMT 9.55 AM). Let’s get a glance over their respective business model, financial position, and outlook to understand the gravity of their latest trading statements.

Barclays (LON:BARC) Performing Resiliently with Diversified Business Model

Barclays PLC is a FTSE 100 listed company, which is engaged in Consumer, Corporate and Investment Banking. It is a British based bank, which is diversified by clients, geography and customers. It has two major operating division, namely Barclays UK and Barclays International. It also deals with global investment banks and corporate clients.

(Source: Annual Report)

Business Structure

• Barclays UK: It comprises Barclaycard Consumer UK businesses and UK Personal & Business Banking.
• Barclays International: It comprises Cards & Payments businesses, Corporate and Investment Bank and International Consumer.
• Barclays Execution Services: It provides support related to operations, technology and functional services to the entire Group.

Strategic Pillars – Creating Opportunities for Future

• Focusing on Clients and Customers: Keeping the business decision centered towards client’s satisfaction. The Group continues to see strong net promoter score, and in 2019 the Group expanded its market share.
• Growing Digitally: In Barclays UK, the Group has over 8.5 million users of mobile application and 11 million actives users digitally. 80 per cent of its client’s digital platforms in Corporate Banking.
• Strengthening the Culture: Launched BeWell programme for employees. The strong culture is imperative for their business which keeps away the risk of a compliance breach.
• Keeping the momentum of Diversification: Diversification is their core strength; the Group is targeting to expand operations in Europe now.

Significant Updates of 2020

• 31^st March 2020: The Barclays Group announced the suspension of interim dividend payments and share buyback program for the financial year 2020, to preserve liquidity for tackling uncertainties imposed by Covid-19.
• 10^th February 2020: The Group had extended the partnership with Visa by signing a multi-year agreement. Barclays has been tied up with Visa for more than 50 years.
• 23^rd January 2020: Barclays had announced the partnership with Nimbla for fintech solutions.

First Quarter of 2020 (as on 29^th April 2020) – Reflecting Decent Performance with the Group’s Diversified Business Model

• The company announced the trading update for the three months ended 31^st March 2020 (Q1 FY20). Despite the initial impacts from the COVID-19 pandemic, the Group delivered resilient operating performance, with the Group RoTE (return on tangible equity) of 5.1 per cent and earnings per share (EPS), excluding litigation and conduct, of 3.5 pence.
• Led by strong performance in Corporate and Investment Bank (CIB) (+44 per cent), the total income increased by 20 per cent to £3 billion in Q1 FY20. Whilst the operating expenses were stable, resulting in an enhanced cost to income ratio of 52 per cent (Q1 FY19: 62 per cent), excluding litigation and conduct.
• CET1 ratio for the first quarter of 2020 decreased to 13.1 per cent (December 2019: 13.8 per cent), primarily reflecting RWA (Risk-Weighted Assets) growth partially offset by 100bps of profits pre-credit impairment charges and 35bps from cancellation of the FY19 dividend.
• In Q1 FY20, the tangible net asset value (TNAV) per share surged to 284 pence (December 2019: 262 pence), reflecting positive reserve movements, including currency translation reserves and retirement benefit re-measurements.
• Liquidity position remained high quality and prudently positioned, with a liquidity pool of £237 billion and LCR (liquidity coverage ratio) of 155 per cent.
• LDR (Loan to deposit ratio) reduced to 79 per cent, reflecting heightened Revolving Credit Facility (RCF) drawdowns in CIB more than offset by increased deposits.

Share Price Performance

Daily Chart as of April 29^th, 2020, before the market close (Source: Thomson Reuters)

BARC’s shares were trading at GBX 103.59 on 29th April 2020 (before the market close at 9:01 AM GMT+1). Stock's 52 weeks High is GBX 192.99 and Low is GBX 73.04.

Outlook and Guidance – Reflecting Positive Scenario but Short-Term Headwinds Exist from Spend on COVID-19 Initiatives

2020 performance is expected to reflect the challenging environment, including headwinds from COVID-19. BUK (Barclays UK) and CC&P (Consumer, Cards & Payments) income headwinds are projected to continue for the rest of the year 2020, driven by macroeconomic downturn caused by the COVID-19 pandemic and lower interest rate environment. Markets client flows have continued at healthy levels; however, it is too early to guide for the quarter or for the remainder of the year. The Group’s has a target of over 10 per cent RoTE and cost to income ratio to stay below 60 per cent over time. CET1 ratio managed to ensure appropriate headroom above the MDA (Maximum Distributable Amount) hurdle. The Board will decide on future dividend, and capital returns policy at year-end 2020.

Next PLC (LON:NXT) – Prolonged Adversity in Sales Calls for Refinancing Liquidity

Next PLC is a FTSE 100 listed, British multinational retailer which deals in clothing, footwear and homeware products. The Company sells its in-house NEXT branded products, designed items of its LIPSY brand and nearly 1,000 third party brands through their online channel called, LABEL. The Group also provides a credit facility for its UK based customers through nextpay.

For overseas operations, the Group has 1.5 million overseas customers, 185 stores (primarily franchised) in 31 countries. The online orders are catered through UK based warehouse and its international hubs.

(Source: Presentation, Company Website)

Highlights of Long-term Strategy

• Enhancing the product range of its in-house brand NEXT.
• Continuous improvement in profitable customers across both UK and international online channel.
• Efficient management of cost, product sourcing and stock management to improve margins.
• Maintaining a secured capital structure and strong balance sheet.
• Generating enough surplus funds to return shareholders through dividends or share buyback.

Vital Developments of 2020

• 14^th April 2020: The Group announced the reopening of its Warehousing and Distribution Operations and its Online operations which were temporarily closed on 26^th March 2020.
• 3^rd April 2020: Next PLC announced its eligibility to access the Covid Corporate Financing Facility.
• 13^th February 2020: The Group announced the repurchase of its own 15,301 ordinary shares at 6973.0565 pence per share. The purchase was made through the UBS AG London Branch (broker).

Trading Statement (as on 29^th April 2020) – Conducted a Revised Stress Test of the Company’s Performance for 2020

• For the period from 26 January 2020 to 25 April 2020, the total full-price sales, including interest income, decreased by 38 per cent, due to a decrease in retail division (-52 per cent) and Online division (-32 per cent).
• The cash cost of lost sales can be partially mitigated by

1. the cancellation of stock,
2. operational cost savings, and
3. reduced lending for Online sales

• Currently, the company is financed by £1,575 million of bonds and bank facilities. The Group stays at least £400 million within its debt.
• As per the current scenario, the Board has decided not to pay a dividend in August 2020 and do not anticipate paying one in 2021 January. Almost all the board of directors have agreed to waive 20 per cent of their salaries and fees.
• From the perspective of the year ended January 2020, the total sales increased by 3.3 per cent to £4,361.8 million; statutory sales stood at £4,266.2 million in FY20; Group profit before tax of £728.5 million was just ahead of the previous guidance; the statutory earnings per share surged by 7 per cent to 472.4 pence.

Share Price Performance

Daily Chart as of April 29^th, 2020, before the market close (Source: Thomson Reuters)

NXT’s shares were trading on 29th April 2020 before the market close (at 9:03 AM GMT+1), at GBX 4,768.00. Stock's 52 weeks High is GBX 7,358.00 and Low is GBX 3,311.00.

Short Term Scenario

The company is facing challenging conditions after Covid-19 outbreak. A continuous weakening in general retailers and the online platform has affected the financial performance of the Group. The company reported a decent financial performance during the latest financial year results. The sales would be assisted by positive earnings with continued strengthening expected in 2019. In the upcoming period, the online and retail sales would be down, due to the closure of stores and online platform. However, the company has now re-opened its online, warehousing and distribution channels. On 14^th April 2020, the company re-opened the warehouse picking operation. Despite the worst-case scenario of sales, NXT still is expected to deliver positive EBITDA and reduce year-end financial net debt.