Interactive Investor

Next issues another profit upgrade alongside strategy insight

This is another set of strong results, and an explanation of latest tactics outlines the retail giant's ambitious growth strategy. Our head of markets analyses latest developments.

21st September 2023 08:24

by Richard Hunter from interactive investor

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    Next (LSE:NXT) has raised its profit guidance yet again, alongside opening the doors to reveal the very core of its corporate thinking.

    As such, the numbers themselves are something of a sideshow as Next moved into a deep dive on its strategy, aspirations, growth areas and the wider environment in a lengthy release. The scale of its aspirations is far-reaching and includes, but is not limited to, the opportunities arising from the enhanced Total Platform, extending its overseas reach and new product offers arising from its third party and licensing capability.

    All are largely dependent on the technology which it has been busy developing, enabling for example the acquisition of new brands via its website which, although lower margin, are also significantly lower risk.

    That being said, the numbers are better than expected and are further proof of a business with longer-term plans to build on an already firm foundation. Pre-tax profit for the six months to 29 July rose by 4.8% to £420 million, while for the full-year the number is now expected to come in at £875 million from a previous estimate of £845 million. The upgrade is the latest in a series this year and, equally importantly perhaps, takes the guidance in excess of the £870 million achieved last year for the first time in this reporting period.

    Total group sales rose by 5.4%, with online continuing to demonstrate its importance. Accounting for almost 60% of sales, growth of 5% nudged up overall returns. Retail, which is responsible for a further 35% of sales grew by a marginal 0.5%. At the same time, the contribution of full-price sales, as opposed to the prevalent discounting which had previously been in force, has had a material impact, with growth of 3.2%.

    Over the period, the group has also made strides on both sides of the trading equation. In terms of sales, improved weather and pay rises which are now largely in line with inflation (although Next expects that effect to lessen over the remainder of the year) boosted returns.

    On the cost side, savings of £127 million will largely offset the £168 million which the group will incur through its own wage inflation, energy cost increases and technology spend. At the same time, online efficiency has been improved partly due to more warehouse space, such that net margin for the channel rose by 0.9% to 16%.

    The group has high hopes both for its Total Platform expansion and its overseas reach. For the former, while the current net profit of £28 million reveals a channel in its early days of expansion, the Return on Capital Employed is running at 25% and is part of the reason that the group felt compelled to offer a lengthy explanation of its potential. With regard to Next overseas, total sales grew by 18%, operating profit by 132% and net margin doubled to 14%, with the potential of more to come.

    The outlook statement for the full year is typically guarded, but perhaps more positive than has traditionally been the case. Apart from the profit upgrade, the guidance for brand full-price sales growth has been increased from 1.8% to 2.6%, while inflationary pressures in terms of selling prices and operating costs are expected to continue easing over the coming months.

    Less positively, the group injected an air of caution, suggesting that the employment market could soften in the shorter term, alongside a waning effect of previous pay rises as seen across the public and private sectors in the UK. 

    Next has long been regarded as a well-oiled machine and clearly has the determination to drive progress. The combination of lower costs and an online offering which continues to prosper underpins financial performance and augurs well for future development of the offering as a whole.

    The shares have more recently seen the benefit of increasing expectations, having risen by 24% over the last year, as compared to a gain of 6.8% for the wider FTSE100 index. The two-year performance remains negative, however, where the shares remain down by 12% and some way off the peak of £81 achieved in November 2021.

    Even so, Next has once again shown its credentials for existing and future growth, and the market consensus of the shares as a strong hold could well become subject to some upward revision.

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