Next delivers another upgrade and remains optimistic

True to form, Next (LSE:NXT) has provided a pleasant surprise in its sales figures leading to a guidance upgrade, while also maintaining its typically cautious outlook.

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The almost inevitable upgrade to full-year forecasts – if only in full price sales rather than the previously raised pre-tax profit number, which was a small weight on the opening share price given high market expectations – comes after a strong quarter in which the international business was the standout performer.

For the group as a whole, full price sales growth of 8.1% compares to an estimated increase of 5.8% for the second half of the year, comprising a 2% rise in the UK business but a stunning 32.2% hike internationally, where Next had estimated 20.5% for this period.

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Indeed, in the online international business, Next is creating something of a virtuous circle. Its marketing is clearly hitting the spot, leading to higher sales, which enables additional spend to reinforce awareness of the brand. The amount spent on marketing rose by 67% compared to last year, and is far ahead of the 42% increase the group had estimated given the increasingly successful runway. These gains come despite new EU tariffs, which the group will mitigate through selected price increases and adapting its operations.

This strong growth also reinforces Next’s previously stated strategy, which underlines the group’s unparalleled understanding of the markets in which it operates and its ability to capitalise on new opportunities. 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.

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Even so, Next remains optimistic but not cavalier, and its guidance is typically conservative. Growth in the online international business is likely to slow in the final quarter as it comes up against some tough comparatives, while in the UK the only area of weakness is in the physical retail space, where store sales fell by 1.7% in the quarter, hindered by the unseasonably warm weather which impacted sales in September, although October saw a return to form. While this was more than offset by strength elsewhere, it remains an area on which Next will focus. Much has been made across the sector of the inflationary impact of higher energy prices from the current Middle East conflict which threatens to heighten input costs as well as crimp consumer demand.

As such, full price sales are expected to grow by 5.8% in total across the group in the final quarter, which leads to an upgrade to the full-year estimate to 7.3%, up from the 6.7% previously guided. Meanwhile, pre-tax profit guidance remains unchanged at £1.255 billion, which would represent an increase of 8.4% on the corresponding period.

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At the same time, shareholder returns remain another major investor attraction, swinging between share buybacks or special dividends depending on the level of the share price. At present, the share buyback is effectively on hold given the group’s new threshold of £136.50 per share before continuing with the programme as compared to the share price which is in excess of £156.

So the pendulum has swung to the dividend, which is currently running on an attractive 4.1% yield including specials payouts. The balance of excess cash will find its way back to shareholders via either route at the year end.

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Next has reassuringly shown its mettle once more in a famously competitive environment, in which it is seen as something of a bellwether. The share price has risen by 10% over the last year as compared to a gain of 11% for the wider FTSE100 and by 113% over the last three years, which is a considerable achievement given the traditional restraints which retail stocks face.

And, while the share price and valuation may be breaking new and uncharted territory, so are growth and profits. While the bar is set increasingly high by the group’s ability to deliver time and time again, the market consensus of the shares as a buy reflects that investors recognise the singular strength of this slick and well-regarded company.