ii view: internet savvy Next builds strength online

Near-term headwinds have grown but expanding online sales of third-party brands is not to be ignored. Buy, sell, or hold?  

Full-year results to 31 January

• Brand full price sales up 32.4% year-over-year (up 12.8% from 2019/2020)
• Pre-tax profit up 140% to £823 million (up 10% from 2019/2020)
• A dividend of 127p per share (2021/2020: Nil)
• Year-end net debt down 46% from 2019/2020

Guidance:

• Forecasts pre-tax profit for the year ahead of £850 million, down from a previous estimate of £860 million

Chairman Michael Roney said:

"We enter 2022 with confidence in the outlook for our business and its ability to continue its successful evolution. The effects of the pandemic are ongoing and we remain mindful of macroeconomic and geopolitical risks, but our continued investment over many years in our people and our systems has generated strong and resilient results in the past year and we believe that it will continue to do so."

ii round-up:

Next (LSE:NXT) is a retailer of clothing and homeware products under both its own and over 1,000 third party brands. It competes with the likes of Marks & Spencer (LSE:MKS), ASOS (LSE:ASC) and Boohoo (LSE:BOO). 

Next Online, generating 64% of overall group 2021 sales, has around 5 million UK active customers and websites serving over 65 countries. Online overseas customers total approximately 1.5 million. 

Next Retail operates around 500 stores across the UK and Ireland and accounted for almost 30% of 2021 sales. 

Its Finance business, providing over £1 billion in credit, generated most of the remaining sales, with its overseas largely franchised stores the balance. 

For a round-up of these latest results, please click here.

ii view:

Having established an online business which now comfortably sells more than its high street retail outlets, Next has in recent years been adapting its business model further. Liberated from the constraints of finite retail space, it now believes it can offer far more choice to its customers. Selling a growing array of third-party brands using its already established infrastructure, it is now viewing this as an independent business in its own right, with the Next brand a contributing customer. Third-party, or LABEL brands through the Next website have grown by 69% over the past two years to £865 million. 

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For investors, the closure of selling websites in Russia and Ukraine and the subsequent downgrading of 2022 profit expectations is not to be ignored. A cocktail of outlook uncertainties including customer cost of living concerns, rising business costs, and heightened geopolitical tensions all now offer headwinds. Chief executive succession and the importance of Lord Wolfson also warrants consideration. 

That said, the use of its established online infrastructure to encompass and sell third-party brands offers growth potential. The convenience of ordering online and, if necessary, collecting and or returning via its store network remains appealing. Management’s estimate of cash generation in the region of £14.7 billion over the next 15 years also underlines its potential to make shareholder returns, with the shares currently sat on an estimated future dividend yield of over 3%. For now, and while room for caution exists, the head start established over rivals in the online race offers long-term attraction. 

Positives: 

• Both product and geographical diversity
• Continued growth in online sales 

Negatives:

• Rising costs
• Chief executive considered key in prospects

The average rating of stock market analysts:

Buy