ii view: bad year for Next continues

This FTSE 100 high street icon has suffered a tough 2022 and now offers a forecast dividend yield of around 4%. Buy, sell, or hold?

First-half results to 30 July

• Revenue up 12.3% to £2.38 billion
• Pre-tax profit up 16% to £401 million
• Interim dividend of 66p per share
• Share buybacks totalled £228 million
• Net debt of £1.03 billion

Guidance:

• Expects full-year profit of £840 million, down from £860 million
• Intends to recommend a final dividend of no lower than the 127p per share
• Expects year-end net debt of £700 million

ii round-up:

Next (LSE:NXT) is a retailer of clothing and homeware products under both its own and other third-party brands. 

Next Online, generating just over three-fifths of overall 2021 sales, has over 6 million UK customers and around 1.9 million overseas customers.  

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Next Retail operates around 500 stores across the UK and Ireland, along with almost 200 stores, mainly franchised outlets, overseas. Stores generated around a third of sales during 2021. 

Finally, its Finance business, providing over £1 billion in credit, generates most of the remaining sales. 

For a round-up of these latest results announced on 29 September, please click here.

ii view:

Tracing its roots back to 1864, the retailer was founded as J Hepworth & Son, a gentlemen’s tailors in Leeds. The first women’s Next store opened in February 1982. Today, and headquartered in Leicester, the FTSE 100 retailer employs over 25,000 people and competes with the likes of Marks & Spencer (LSE:MKS), ASOS (LSE:ASC) and Boohoo Group (LSE:BOO).

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For investors, a highly uncertain economic outlook, including a cost-of-living crisis for consumers and rising interest rates cannot be ignored. Management’s own caution is reflected in downgrades of both second-half sales and full-year profits. Costs for businesses remain elevated, the competition is not standing still, while the succession of CEO Lord Wolfson warrants consideration given his importance to the company.

More favourably, and despite the muddying impact of the pandemic, longer-term growth at its core online business continues, with profit up 19% from the pre-pandemic 2019. A forecast price/earnings ratio of under 10 now sits comfortably below the three-and 10-year averages, while cash generation currently underpins both a share buyback programme and an estimated future dividend yield of close to 4%. 

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On balance, and while investor patience will be required, this well-managed company will likely receive long-term support.  

Positives: 

• Both product and geographical diversity
• Majority of sales generated online 

Negatives:

• Uncertain economic outlook
• Chief executive considered key in prospects

The average rating of stock market analysts:

Strong hold