Interactive Investor

Russia forces Next to trim profit forecasts

24th March 2022 08:59

Richard Hunter from interactive investor

This well-regarded blue-chip has prospered despite the tough economic conditions, but even it is having to make adjustments.

Next (LSE:NXT) has delivered another set of impressive results despite having one arm tied behind its back by the current economic outlook.

Next manages market expectations as carefully as it manages its stock levels, often over-delivering on its previous guidance, as evidenced by the five profit upgrades over the last year.

Indeed, the pre-tax profit figure of £823 million is bang in line with the latest in that series of upgrades and is 140% higher than last year’s number. Equally importantly, the profit marks an increase of 10% to pre-pandemic levels. Also compared to two years ago, full-price sales have risen by 12.8%, earnings per share have increased by 12% and net debt has reduced by 46% to stand at a level of £600 million.

The previously announced special dividends also propel the yield to 4.2%, which is punchy given the current interest rate backdrop. There is also a likelihood that share buybacks will return to the agenda in the medium term, subject to the company’s own specific benchmarks, which measure the most effective way of enabling returns to shareholders.

The presence of a strong online operation has served the company well over the course of the various lockdowns, and some of the lost retail sales are now being recovered as the world had begun to return to some kind of normality. The more typical lines of best selling products inevitably changed over the period, such as the current return to more formal clothing and away from the casual clothing typified during the working from home period, while Home sales have also dipped of late following the partial return to the office for many.

Next is also mindful of the breadth and depth of competition in the retail space, with barriers to entry being fairly low at present and with the next fashionable line being just around the corner at any given time. It has therefore taken this as an opportunity rather than a threat in growing its third-party LABEL businesses, allowing a mutually beneficial revenue stream for sometimes smaller retailers to benefit from the scale of Next’s existing infrastructure.

At the same time it is ploughing ahead with a capital investment programme designed to keep its presence and processes ahead of the field. This could well benefit growth with additional third parties and need not be confined to UK shores, as overseas expansion remains within the realm of the company’s growth strategy.

In terms of outlook, the company has shaved £10 million from its latest profit guidance, largely due to the closure of its websites in Russia and Ukraine, but partly mitigated by an improved outlook for its UK Retail arm. Similarly, the growth in full-price sales is now expected to reach 5%, as opposed to the previously guided 7%. Next is also mindful of the risks ahead, and has listed these quite openly, including the unwinding of pandemic savings and a return to spending on travel and leisure as restrictions ease.

The share price has suffered a sharp decline since the trading statement in January as markets have fallen on any number of fronts. For Next, the spectre of an impending cost of living crisis driven in part by rampant inflation has weighed heavily. Quite apart from rising costs having a likely impact on the consumer’s propensity to spend, the company is facing its own challenges which include higher freight rates, increased manufacturing costs and upward pressure on UK wages.

This has left the shares down by 17% over the last year, as compared to a gain of 11% for the wider FTSE 100. Even so, the shares have risen by 80% over the last two years from the time when the pandemic was beginning to overshadow the global economy. For Next, which remains a tight ship and a well-regarded business, the likelihood is that it will continue to capitalise on the factors within its control. The market consensus of the shares remains a buy and is reflective of optimistic prospects for the business in the longer term.

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