Next over-delivers again in Q2 and upgrades guidance

The Next (LSE:NXT) naysayers who eschew the UK retail sector have been dealt another blow, as the group continues to fire on all cylinders. Next now has the reputation of a company which under-promises and then over-delivers, and this update is no exception.

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In typical fashion and despite its customary cautionary outlook, the group has raised its guidance once more for its full-year returns, with full price sales now expected to grow by 5% compared to the previous estimate of a 3.5% spike. As a result, Next expects pre-tax profit for the year as a whole to hit £1.105 billion, a rise of £25 million from the previous number.

The full-year full price estimates for growth of 1.9% and 19.4% for its UK and international online businesses respectively are, in isolation progress enough. However, the group points out that these compare with rises of 10.9% and 28.1% in the first half, and the slowdown in growth in the UK has been fully explained.

The cyber incident at Marks & Spencer Group (LSE:MKS) and warmer weather were both tailwinds to a strong first half which will not be repeated in the second. In addition, the numbers will come up against stronger comparatives from last year, and the group is also predicting a dampening of consumer demand as job openings become scarcer and as the full effects of the National Insurance contribution rises begin to wash through.

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Even so, the strength of the performance in the year to date resulted in full price sales growth of 10.5% in the 13 weeks to 26 July, against a guided 6.5%, adding £49 million to revenues. The online business continues its rampant march, with UK and international online growth of 9% and 26.4% respectively. The Label business ploughed ahead by 10.1%, while even the lesser retail stores line put on 5.6% in the quarter.

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.

In addition, 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.

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.

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Meanwhile, the share buyback programme is currently on hold, possibly for the rest of the year. Next has a delicately balanced calculation, and in this period the share price did not meet the group’s own hurdle to make the buyback worthwhile. At present, the dividend yield, which is not traditionally an attraction of the stock remains at a pedestrian 1.9%, although the possibility of a special dividend to come based on excess cash seems more likely than not.

Perhaps unsurprisingly, the share price has awoken to the singular strength of this slick and well-regarded company. The share price growth of 36% over the last year, as compared to a gain of 9.2% for the wider FTSE100, lifts the two and five year performance to a positive 73% and 123% respectively.

Inevitably, the shares have surpassed the historic valuation which, in addition to the uncertain wider economic prospects, has led to a market consensus which remains stubbornly stuck at a hold, albeit a strong one, which has been the case for some considerable time. Even so, if this level of inexorable progress is maintained as has been the case to date, those who doubt the company’s prospects may continue to do so at their peril.