Next: another striking period of growth

There has been limited change since a detailed July update, with Next (LSE:NXT) reiterating its traditionally cautious outlook for the months ahead. Ironically, the lack of an almost assumed profit upgrade as is usually the case may have taken some of the shine from what has nonetheless been another striking period of growth, with the share price taking a rare beating in opening trades.

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The strength of any caution is warranted as the second half is unlikely repeat the tailwinds of the first. Favourable weather and the additional business gained from the Marks & Spencer Group (LSE:MKS) cyber incident, the effects of National Insurance washing through (net margin declined by 0.5% to 8.9% as a result) and strong comparatives will combine for a lower result.

Nonetheless, guidance for the full year is unchanged, with full price sales expected to grow by 7.5% (4.5% in the second half) and pre-tax profit to reach £1.1 billion. In the meantime, the strength of the opening part of the year is clearly evident, with Next brand full-price sales up by 10.9% and overall group sales by 10.3% to £3.25 billion. Within these numbers, UK Retail and UK online, which account for 78% of overall sales, grew by 5% and 9% respectively. Pre-tax profit of £515 million represented an increase of 13.8% on the corresponding period and was ahead of market expectations of £506 million.

Over the period, Next has jumped on its increasing international presence and has increased its website functionality, improved its digital marketing and developed third-party relationships. The overseas third-party distribution network enables the Next brand to reach new markets, and even at this relatively early stage of its ambition the group previously highlighted a rise of 350% in international website sales over the last 10 years. In this period sales increased by 28%, including notable and potentially explosive growth of 58% in the US.

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Indeed, the numbers underline the group’s unparalleled understanding of the market in which it operates and its ability to capitalise on new opportunities, such as the potentially exciting opportunities in the international business. The group believes that international tastes in clothing are beginning to converge, not least of which is due to the increasing visual power, appeal and presence not just of the internet, but also the rise of streaming services which are now increasingly used by younger audiences. As such, the group is making strides into new territories with a hybrid approach. For practical reasons, far-flung markets such as the US and Asia have proven difficult in terms of delivery, and Next is therefore seeking to establish a number of high-profile third-party partnerships to enter those regions.

The group has a very simple and clear appreciation for product (the brand) and platform (enabling third-party sales) being its current drivers. Indeed, over recent times the group has leaned towards full-price sales at the expense of discounts, and the strategy has paid off with the company previously noting that there is an increasing proportion of customers who are buying fewer, but more expensive items, which potentially brings new opportunities for Next slightly higher up the price chain. Nor is the group standing still on expanding its offering, with new websites aiming at new markets within its offering, such as “Sports Club” and “Seasons”, the latter of which is aimed at the premium and luxury customer.

Meanwhile, the share buyback programme is currently on hold, possibly for the rest of the year, since the share price has exceeded the group’s own target (currently £118 per share) of triggering such a buyback. Instead there is an increase to the dividend, where the yield which is not traditionally an attraction of the stock remains at a pedestrian 2%, although the possibility of a special dividend to come based on excess cash seems more likely than not.

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Next is defiantly at the top of its game and has every intention of staying there, even though expectations are always on the rise for this sector bellwether. The shares may now be trading slightly above their longer-term valuation and of course, the retail arena remains fiercely competitive, but Next seems to have an unparallelled understanding of its market which has consolidated its leading position at home and is rapidly expanding overseas.

A share price hike of 14% over the last year compares to a gain of 11.6% for the wider FTSE 100 and over the last three years, the shares have added 107%. Based on past performance, it would appear that the naysayers who have doubted the stock’s trajectory may continue to do so at their peril, with the market consensus remaining stuck at a strong hold, as has been the case for some considerable time.