Next ready for the fight but profit prediction disappoints 

Results and trading updates from the high street retail giant are almost always met with a dramatic reaction one way or the other. Our head of markets runs through annual results and a sharp decline in share price.

Next (LSE:NXT) has beaten expectations with these annual results and has also laid some ambitious foundations for what it considers to be the next big leg of growth.

The shifting sands within the retail sector have become evident and, fortunately, Next has exposure to both areas. The return of the consumer to physical stores has had some impact on online sales, although compared to pre-pandemic levels both are comfortably ahead.

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At a group level, total trading sales rose by 8.4% for the year ending January 2023 to £5.15 billion, and by 20.6% compared to pre-pandemic. Within this number, retail sales rose by 30% (up 1% versus pre-pandemic) and online declined by 2% (up 40%). Operating profit in retail rose by 125% in the year and declined by 23% in online, although the latter remained ahead by 12% over a three year period.

A return to City centre shopping has been the most notable switch, whereby previously it was the out of town retail parks which were experiencing most visits. At the same time, Next has been busy closing non-performing stores, while also renegotiating leases to keep the retail store estate on a sound and flexible footing. 

Another notable change since the pandemic hit has also been the contribution of full-price sales, as opposed to the prevalent discounting which had previously been in force. Full-price sales since the pandemic have risen by 20.5%, and by 6.9% over the last year, which is something of an achievement given the constraints which the cost of living crisis has placed on many consumers.

The combined actions which the group has taken led to a rise in pre-tax profit to £870.4 million from £823.1 million the year previous and ahead of the previously guided number of £860 million. The result is also 16.3% higher than pre-pandemic, representing not only a return to form following the various lockdowns but also proof that progress has been ground out despite the obvious restrictions.

Disappointing guidance

The outlook for the year ahead contains the customary caution from the group. Next is maintaining that it sees a reduction of 1.5% in full-price sales and pre-tax profit of £795 million. However, many in the City had hoped Next would increase profit guidance this time, and current consensus estimates is for £810 million. Some were looking for almost £850 million given recent upbeat numbers from industry peers.

While the company sees some improvement to the overall drag of inflation given reduced factory gate prices and lower freight costs, wage inflation and utility bills remain a thorn in the side which will likely impact overall performance. Selling price inflation is still likely to come in at 7% over the Spring and Summer seasons versus a previous estimate of 8%, and at 3% over Autumn and Winter (previously 6%).

In the meantime, shareholder returns remain a focus. The group expects to roll out a similar share buyback programme to the one implemented this year, running to approximately £220 million. The dividend payment has also been increased by a touch more than expected, pushing the projected yield to just over 3.1%.

In terms of the future, Next certainly does not see itself as running short of either growth or ideas. Indeed, it has announced a further plan for which its optimism has heightened given the early success of some of its more recent acquisitions and third party operations. The strands of growth are split into the four areas: total platform (running operations for Reiss, GAP, Victoria’s Secret and Laura Ashley), investment and acquisitions, new brands and third party licences and overseas expansion. Each of these has to some extent already been tested and proven on a smaller scale and the group now considers that the time is right to turn up the heat for more measured expansion.

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For patient investors, this potential light at the end of the tunnel cannot come quickly enough. Next has been a company which has languished in terms of market consensus over recent years, despite being generally well-regarded and certainly well-managed. This consensus currently remains at a 'strong hold', with the company having thrown down the gauntlet in setting out its plans for the future. 

In the meantime, and despite some weakness in early exchanges, the shares have risen by 7% over the last year, as compared to a marginal decline of 0.7% for the wider FTSE100 and have added almost 50% since pre-pandemic. The challenges will undoubtedly continue to come thick and fast in the notoriously competitive retailing space, but Next seems ready for the fight.