ii view: should inflation concern Next investors?

A fifth profit upgrade but management also offers caution for the year ahead. Buy, sell or hold? 

Fourth-quarter trading to 25 December versus Q4 2019

• Online Next UK full-priced sales up 31%
• Online LABEL UK full-priced sales up 85%
• Retail store sales (UK and Ireland) down 5.4%
• Total full price sales up 20%
• Paying a second special dividend of 160p per share

Guidance:

• Increased its full year pre-tax profit estimate by £22 million to £822 million for this year
• For the year ahead, estimates full price sales growth of 7% versus 2021/22
• Forecasts pre-tax profit for the year ahead of £860 million, up 4.6% versus the current financial year

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.  

Next Online, generating two thirds of group 2020 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 just over a quarter of 2020 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 this latest trading update, please click here.

ii view:

Next was quick to spot the trend towards online sales. Its Directory business has grown to offer both the convenience of ordering online and, if necessary, collecting and returning via its store network. It competes with the likes of Marks & Spencer (LSE:MKS), ASOS (LSE:ASC) and Boohoo (LSE:BOO). 

For investors, management caution regarding inflation and elevated costs over the coming year should not be overlooked. Higher freight rates, increased manufacturing costs and upward pressure on UK wages all add to concerns. Succession and the importance of chief executive Lord Wolfson at the business also warrant consideration. 

More favourably, a profit estimate for the year ahead that is 4.6% above the expected outcome for the latest full year suggests management confidence in profit growth. Online sales remain a company strength, while a forecast dividend yield of close to 3% is not insignificant in an era of ongoing ultra-low interest rates. In all, while grounds for long-term optimism persist, the headwind of inflation does arguably give cause for some caution at this stage. 

Positives: 

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

Negatives:

• Inflation related headwind
• Chief executive considered key in prospects

The average rating of stock market analysts:

Buy