A record high for Next after new upgrade

Next (LSE:NXT)’s ability to shoot the lights out is alive and well, resulting in yet another profit upgrade for the year as a whole.

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As one of the best run and most respected stocks within the FTSE100, Next finds itself needing to walk the continuous tightrope of becoming a victim of its own success, with expectations for its results being so high. Even so, the latest quarter has blown past estimates by a striking margin and, as a result, pre-tax profit for the year has been lifted from a previous £1.1 billion to £1.135 billion.

The optimism follows a set of numbers which were coming up against strong comparatives, and where the group had previously cautioned that the success of the second half would be less than that of the first. Favourable weather and the additional business gained from the Marks & Spencer cyber incident would not be repeated, while the effects of National Insurance would be washing through (net margin previously declined by 0.5% to 8.9% as a result) and with anaemic UK economic growth being an additional headwind.

However, the performance for the quarter tells a different story. Full price sales rose by 10.5% versus a previous estimate of 4.5%, adding £76 million to the mix, and leading to a revised full-year expectation for 7% growth. While fourth-quarter estimates are lower than the actual third quarter outturn, Next nonetheless expects growth of 4.1% and 24% for the UK and Overseas businesses respectively. Group sales should benefit to the tune of £150 million as the Christmas sale was brought forward to the mid-season September sale, giving products longer on the shelves.

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In the meantime, the full price sales numbers are striking. For the UK, growth came in at 5.4% against an estimated 1.9%, and was lower than the first-half number of 7.6% as predicted. The overseas business continued its inexorable growth of 38.8% versus an estimate of 19.4%, and sailed past the first-half rise of 28.1%, as the virtuous circle of improved sales enabling a 50% increase in digital marketing spend kicked in.

Indeed, 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 at 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.

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. Nor is the group standing still on expanding its offering, with new websites aiming at new markets within its offering, such as “Sports Club” and “Seasons”, the latter of which is aimed at the premium and luxury customer.

Next has also confirmed that its share buyback programme remains on hold, since the share price is well above the group’s own target (currently £121 per share) of triggering such buybacks. Instead, based on current assumptions, there is likely to be a special dividend of around 310p per share which would fire the projected yield to 4.1% as compared to the currently pedestrian 1.8% level.

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Unsurprisingly, the share price has awoken to the singular strength of this slick and well-regarded company. Even prior to the strong price spike at the start of trade today - up as much as 7% to 14,405p - a rise of 33% over the last year compares to a gain of 18% for the wider FTSE100, helping lift the three-year performance to growth of 172%, which is a considerable achievement given the traditional restraints which retail stocks face. 

Such gains may well put Next on a premium to its longer-term valuation, but given the group’s ability to deliver time and time again, perhaps the punchy price is justified. The market consensus of the shares as a strong hold, which has been in place for some time, has been shown to have missed the boat on several occasions, where the naysayers who have doubted the stock’s trajectory may continue to do so at their peril.