Interactive Investor

Next celebrates Christmas boom with special dividend

6th January 2022 08:21

Richard Hunter from interactive investor

The stock market might be lower Thursday, but there's no denying that these are great results from Next. Here's what our head of markets thinks.

Next (LSE:NXT) looks to have finished 2021 in fine fettle, boosted by better-than-expected fourth-quarter trading and bringing the number of profit upgrades during the year to five.

Comparing its performance to more realistic pre-pandemic levels, full price sales for the eight weeks to 25 December rose by 20%, adding £70 million to the revenue number previously guided. Whereas Next had expected weaker growth in the final part of the year, a revival in adult formal and “occasionwear” altered the picture entirely, doubling the rate of its own projections.

The growth was underpinned by another exceptional performance within the company’s longstanding jewel in the crown, namely the online business. Total online full price sales increased by 45%, within which 'Next online' contributed growth of 31% and the group’s third party LABEL offerings continued their stand-out performance with a spike of 85%. Ongoing investment in the overseas business also boosted full price sales by 36%, keeping the door open for potential further expansion in an increasingly online retail world.

Even the decline in retail sales and finance interest income did not depress the overall full price sales number. In terms of the former, estate management will continue to be in sharp focus, with Next retaining the flexibility to shift physical outlets to out-of-town locations where circumstances allow.

Normally, the fact that the end of season sale figure, which fell by 18% largely due to less surplus stock, could be taken as a sign of weaker planning. However, the company was dealing with issues of labour shortages and some supply chain blockages. Perhaps even more impressively, this lower figure largely resulted from the fact that full price sales had been higher than expected in the period, meaning a fuller return on the stock and a positive impact on margins.

The further upgrade to guidance for the full year has also enabled the payment of another special dividend of 160p, in addition to the 110p which has already been paid. This implies a dividend yield of over 3% which is notable in the current interest rate environment, and which also leaves the potential for more gas in the tank as the company returns to the pre-pandemic ordinary dividend cycle, including the possibility of share buybacks if certain hurdles are met.

A Next trading statement would not be complete without the company listing the challenges to come and factors which could upset the financial applecart. For the next financial year, these include the spectres of inflation and the upcoming impact of individual tax hikes, and whether increased overseas travel and the winding down of pent-up demand will have a negative impact on the consumer’s discretionary spend on clothing.

Even so, the company is currently projecting full price sales growth of 7% and an increase in pre-tax profit of 4.6% for the next year. Set against the caveats which Next has imposed, there is reason to believe that this is a company currently firing on all cylinders with every prospect of further growth.

Despite a decline in share price during early exchanges Thursday given the weakness of the wider market, the overall price performance has reflected this strength, having risen by 17% over the last year. That compares with a hike of 10% for the FTSE100 index. Meanwhile, the market consensus of the shares as a "buy" is very likely to remain intact.

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