Next runs out of steam despite cracking third quarter

These third-quarter results reveal a company in rude health but, once again, the shares have failed to hold gains above £83. Our head of markets explains.

Next (LSE:NXT) has continued its relentless progress over the quarter, largely driven by the jewel in the crown which is its online business.

Full price sales in the 13 weeks to 30 October increased by 17% against the chosen comparative of 2019 and are now up by 11.2% in the year to date.

Within this number, there was an increase of 40% in sales at the online business, with a stand-out performance from the group’s third party LABEL offerings, where full price sales spiked by 86%. The breadth of the offering continues to appeal to the Next target market, while its long-established online business continues to earn its corn, particularly given the tailwind of the digital marketing which the channel receives.

The current strength of trading is also enabling Next to consolidate its financial position, and by year-end net debt is expected to have dropped to £610 million, which would represent a decrease of 45% from 2019. It is little wonder, therefore, that the company was previously able to announce a special dividend of 110p. Next is not a traditionally generous dividend payer, nor does the current yield move the dial, but has rather tended to reward its shareholders through share price appreciation, where a 55% increase over the last three years has been achieved despite the more recent extraordinary disruptions.

• The Week Ahead: BP, Next, BT, IAG
• COP26: five top share picks that are climate leaders
• Shares for the future: most high-scoring stocks since January
• Four share tips: buy, hold or sell?

Despite the success of the quarter, guidance for the full-year remains unchanged after having been raised four times this year. The additional profit generated in the third quarter is likely to be directed towards further investment in digital marketing and an increase in air freight and online distribution costs.

Equally, the final quarter of the year is not expected to maintain this brisk pace of growth. Next has cited a number of factors for this slowdown, such as inflationary pressures which may temper the consumer’s discretionary spend, ongoing labour shortages in the UK supply chain and the continuing effect of reducing sales as the effects of pent-up demand begin to unwind. This cautious outlook, which is characteristic of Next’s usual predictions, has likely led to some profit taking in the early exchanges of trading.

At the same time, there are also effects being felt on the only two negative comparisons coming out of the update. Retail store sales are still behind 2019 levels by 6% (and down by 29% in the year to date given the effects of various lockdowns), while the company’s finance interest income has also fallen by 5% (and 9% in the year to date) as consumers with cash to burn choose to eschew the credit option.

Even so, Next remains a business which is in rude health. Its success is in stark comparison to many other struggling retailers, and even some of those who also have an established online presence. The effects of the pandemic on consumer shopping habits is currently suggesting some stickiness towards the online option, but even in the event of the return of strong footfall to stores, Next would also benefit. With the festive season fast approaching, there could very possibly be a further boost to sales, which would round off a strong year.

• The great investment strategies: income investing
• The shares Nick Train is backing to shield against inflation
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

The shares have also responded to the improvement in Next’s fortunes, having risen by 44% over the last year, as compared to a rise of 26% for the wider FTSE100. The market consensus of the shares as a "buy" is unlikely to be threatened given the reassurance of this update for ongoing prospects.