Interactive Investor

Another profit upgrade gives Next shares further boost

A short trading update was all Next needed to convince investors to keep backing the retail giant. ii's head of markets explains why the shares are up and also looks at events moving prices on Wall Street.

1st November 2023 08:35

by Richard Hunter from interactive investor

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      Even within a brief trading statement, Next (LSE:NXT) was able to pack the punch that it is increasing its profit estimate for the fourth time this year.

      At the half-year numbers in September, Next raised its pre-tax profit estimate from £845 million to £875 million. Today the guidance was increased further to £885 million, putting further light between its predicted performance and the previous year’s result of £870 million.

      The latest boost to estimates follows full-price sales growth for the quarter of 4%, compared to the expected 2%, driven largely by an increase of 6.5% in online sales, which account for almost 60% of the overall group figure. With its typically guarded outlook in mind, Next predicts growth of 2% in the final quarter, which would take the yearly number to 3.1%.

      In mid-October, the group announced the acquisition of FatFace for £115 million, which is not expected to have a material impact on earnings this year. It does, however, echo the strategy which Next has been pursuing, including the opportunities arising from the enhanced Total Platform, extending its overseas reach and new product offers arising from its third party and licensing capability. All are largely dependent on the technology which it has been busy developing, enabling for example the acquisition of new brands via its website which, although lower margin, are also significantly lower risk.

      The improved quarterly performance and volatility within its sales performance is one which Next ascribes to changing weather conditions over the period rather than any noticeable change in consumer behaviour. Even so, this remains something of an overhang on the retail sector given the uncertain economic outlook, especially for the likes of Next which has eschewed discounting its products in favour of a concentration on full-price sales.

      The shares are certainly on a roll given its recent ability to confound expectations, and have risen by 40% over the last year, as compared to a gain of 2% for the wider FTSE100. There remains work to be done, though, since the two-year performance remains negative, with the shares down by 14% and some way off the peak of £81 achieved in November 2021.

      Nonetheless, Next has long been regarded as a well-oiled machine with the determination to drive progress, and a recent upgrade of the market consensus to a 'cautious buy' reflects warming appreciation of its prospects.

      Market snapshot

      US markets edged higher in the final October trading session, although this was not enough to stem the third consecutive month of declines for the main indices. The swift and steep rise in Treasury yields has weighed heavily on equities as investors mull the possibility that interest rates will remain at current levels for some time longer than had previously been hoped.

      Today’s Federal Reserve announcement is all but a done deal on interest rates remaining unchanged and indeed now having peaked. Accompanying comments will inevitably be scrutinised for the Fed’s latest thinking on where to move from here, and with the US economy still showing few signs of weakening, the case remains for a tight monetary environment to prevail for the time being.

      Also overhanging sentiment is an expected Treasury announcement today on financing plans, which could reveal a raft of further bond issuance in the final quarter to fund a growing budget deficit. In turn, this could drive yields higher, further impacting equities, although the latest estimates of how much borrowing is required has been lowered by the Treasury, easing some of the pressure which had been building up.

      The third-quarter earnings season is now well over halfway complete, with an estimated 80% of companies having beaten estimates so far and with earnings growth of 5% for the S&P500 still on track. This also comes with some caveats, however, with an increasing theme coming from boardrooms that increasing energy prices, sticky core inflation and conflicts in the Ukraine and Middle East are weighing on prospects.

      In the meantime, the performance of the indices has been crimped, and in the year to date the Dow Jones is now down by 0.3%, with the S&P500 and Nasdaq having added 9.2% and 23% respectively.

      A slightly brighter Wall Street session spilled over into Asian trading overnight, although the optimism was diluted by the time it reached UK shores. The premier index had a cautiously positive start, with strength in Next after its latest profit upgrade reading across to the likes of Marks & Spencer Group (LSE:MKS), while Smurfit Kappa Group (LSE:SKG)’s trading statement pleased on improving demand.

      Conversely, Weir Group (LSE:WEIR) and Segro (LSE:SGRO) stumbled on a weak trading update and a broker downgrade respectively. Despite the brisk opening the FTSE100 remains down by 1.5% in the year to date, while the FTSE250 continues to drift mostly lower and is now nursing a loss of 9.3% so far this year.

      These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

      Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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