Interactive Investor

Next once agains shows its edge

The FTSE 100 retailer reports a 5% rise in annual profits with its online business continuing to be a key element of the group’s success, says ii's head of markets.

21st March 2024 08:34

Richard Hunter from interactive investor

The Next (LSE:NXT) engine continues to purr as the group retains its laser focus on identifying growth opportunities in a famously competitive environment.

At a headline level, pre-tax profit of £918 million is up by 5% on the year previous, and ahead of the expected £905 million. Total group sales of £5.8 billion represented a rise of 5.9% from the corresponding period and were also in excess of the estimates of £5.65 billion. Full-price sales, on which Next has based an important part of its strategy over recent years by avoiding unnecessary discounting, were ahead by 4% which continues to vindicate that earlier decision while also protecting margins.

Within the sales numbers, the online business continues to be a key element of the group’s success, and accounts for 54% of overall revenue. Full-price sales online rose by 6%, profit by 11% and net margin nudged higher to 16%, providing a win on multiple fronts. Nor does Next intend to stand still, with the next year bringing additional focus on the group’s warehousing capabilities as well as a new push through digital and marketing services.

The group has stated that the three major strands of its growth from here relate to its Total Platform, new brands and licences and Next overseas, all of which are showing signs of opening avenues to which the group was not previously exposed. Total Platform, for example, has added three new clients bringing the total to seven and is increasingly a driver of further investment, such as the group having increased its stake in Reiss from 51% to 72% and the acquisition of FatFace for around £115 million. In addition, and alongside its Label offering, this enables the acquisition of new brands via its website which, although lower margin, are also significantly lower risk.

The Next overseas drive also highlights the work which the group is undertaking under the bonnet. 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. Nearer to home, such as in Europe, the distance is less of an issue and so the group will retain more of a local approach. In the meantime, the overseas business is expanding, with sales which increased by 17%, and a net margin which jumped from 8.6% to 13% over the period.

The financial health of the company is another focus on which progress has been made. Net debt has reduced from a previous £797 million to £625 million, while a surplus cash trading position has enabled the delicately balanced shareholder return programme to continue. Based on its own calculation, Next estimates whether excess capital is best deployed through either share buybacks or dividends, leading to £177 million of buybacks over the year without disturbing a dividend yield of 2.4%, which while not punchy of itself, is part of the more nuanced return policy. In terms of outlook, a further £288 million of buybacks are anticipated this year in addition to a similar level of dividend payouts. 

The outlook, as ever, is interesting. Next has noted 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. The group has also noted general price deflation over recent months, meaning that existing prices can largely be maintained, which could serve it well given the inevitable economic headwinds which many consumers are facing. For the coming financial year, full-price sales are expected to grow by a further 2.5%, with pre-tax profit rising by 4.6% to £960 million. 

In all, Next has shown its edge again in an environment in which it is seen as something of a bellwether. Its share price performance has also defied odds which have tended to depress the retail sector elsewhere, having risen by 27% over the last year, as compared to a gain of 2.7% for the wider FTSE 100. The warm initial price reaction to the update could initiate some upgrades to a market consensus which has not broken out of its range for some considerable time. In the meantime, and however enticing Next’s prospects might be, the general view seems to be that the share price is up with events for now, leading to a market consensus which remains at a hold.

interactive investor has recently teamed up with experts at eyeQ who use artificial intelligence, macro factors and their own smart machine to generate actionable trading signals. Here’s what it says about Next: 

Even with our bias to all things macro, eyeQ is warning that these earnings are important.  

Our strategic long-term model shows macro relevance below our key 65% threshold. That means company news is increasingly more important than macro fundamentals. Our shorter-term tactical model has macro relevance of 71% (so the big picture stuff such as growth and inflation are important), but that number is falling. It’s down 14% in the last two weeks.

Analysts will be watching Next’s ability to sell its goods without any need to discount its prices. There have been a few warnings from various retailers of late, suggesting the UK consumer may be starting to retrench somewhat. Next is a good barometer of the health of the UK high street and consumers.

And what is notable is that eyeQ model value is showing signs of rolling over. It’s down around 3% in the last month on our tactical short-term model. Given the run rate for UK economic growth, what inflation is doing, how credit and commodity markets are trading, our smart machine calculates that Next “should” trade around 8,285p. The low for 2024 was 8,129p recorded in mid-January. If we see model value fall below that and make a fresh low, the message will be that macro fundamentals are starting to trend lower.

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