Interactive Investor

Next upgrades profit guidance yet again

3rd August 2023 08:18

by Richard Hunter from interactive investor

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Business has improved over the past few weeks and months, and the high street bellwether now thinks it'll make more money than expected this year. Our head of markets runs through the numbers. 

next retail shop 600

    Next (LSE:NXT) has raised its full-year forecast again, with the latest boost following a successful end-of-season sale.

    The unscheduled trading update in June was due to a material improvement in expected performance, which the group attributed to improved weather and the relative impact of annual salary increases. In turn, the additional revenues resulted in Next raising its estimated pre-tax profit for the year by £40 million to £835 million.

    Since that update, full-price sales have risen by 3.5% versus the group’s own guidance of 0.5%. For the second quarter to 29 July, online sales grew by 10% and retail by 2.2%, leading to overall growth of 6.9%. For the half-year, online and retail hikes of 4.1% and 0.9% respectively resulted in an overall improvement of 3.2%.

    The end-of-season sale turned out rather better than expected, with Next going into the sale with well-controlled stock levels and with surplus stock down by 22% compared to the previous year. Coupled with clearance rates which were also ahead of the previous year, Next estimates that the sale will have added £4 million to pre-tax profit.

    As such, the group is hiking its outlook for the year as a whole. Pre-tax profit guidance has been raised by a further £10 million to £845 million, although this would still represent a decline of 2.9% from the previous year.

    The improved outlook is based on the improved clearance rates of the recent sale, as well as an additional £16 million of full-price sales over the last six weeks. At the same time, full-price sales are expected to rise by 0.5% in the second half of the year, implying a result of a positive 1.8% for the year.

    This is further evidence of a notable change since the pandemic, where the contribution of full-price sales, as opposed to the prevalent discounting which had previously been in force, has had a material impact. At the same time, the return to City centre shopping is also in evidence, whereas previously it was the out-of-town retail parks which were experiencing most visits.

    Next has long been busy in closing non-performing stores, while also renegotiating leases to keep the retail store estate on a sound and flexible footing. At the same time, the long-established online presence is also providing an alternative which the modern-day consumer both expects and mostly uses, contributing over half of Next’s revenues.

    The group had previously noted that there had been some improvement to the overall drag of inflation, given reduced factory gate prices and lower freight costs. However, its own wage inflation and utility bills remain a thorn in the side, which could impact overall performance, while the continuing pressure on a cost-conscious consumer could see a drain to cheaper rivals, although this is not currently evident.

    Further out and beyond the terms of this trading update, Next is seeing the benefit of its more recent acquisitions and third-party operations, where the strands of growth are split into the four areas of its total platform, investment and acquisitions, new brands and third-party licences and overseas expansion. These lower-margin, lower risk third-party operations are ripe for expansion and the technology is already in place. The full contribution of these units is yet to be seen, while the general retail arena remains one of fierce competition, especially in pricing.

    Investors have tended to be cautious on Next’s prospects despite the company being generally regarded as a well-oiled machine, and over the last year the share price has risen by just 2%, as compared to a rise of 1.6% for the wider FTSE 100 index. The market consensus of the shares as a 'strong hold' has long been in place, suggesting that the market still awaits – and indeed expects – Next to reach its full potential in due course.

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