Why Next's results have triggered share price rally

Some of the finer detail from this release was trailed at the group’s trading update in January, but this does not detract from another superlative performance from Next (LSE:NXT). It therefore comes as little surprise that the share price has finally awoken to the singular strength of this slick and well-regarded company.

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For the year, revenues grew by 10.8% to £7 billion, and pre-tax profit by 14.5% to £1.16 billion. The latter contained £8 million of additional profit from the upgraded guidance in January (which itself was the fifth upgrade in a year), due to better than expected full-price sales and end of season clearance rates. 

Full price sales grew by 10.9% for the year, driven by growth in the UK of 7% and internationally of 35%, the latter reaping the benefit of improved stock availability and more profitable marketing expenditure, and both outpacing previous upgrades. Within the UK, which accounts for 78% of overall revenues (32% retail stores and 46% online), the growth was maintained by a laser focus on costs, trends and delivery.

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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 the potentially exciting opportunities in 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 company 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. This potentially brings new opportunities for Next slightly higher up the price chain. 

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The outlook for the current year continues to build on the group’s success hitherto, with full price sales expected to rise by 4.5% to £5.9 billion, pre-tax profit by the same percentage to £1.21 billion, with a further £500 million earmarked for shareholder returns. 

In the meantime, the more recent dips in the share price have resulted in a brief resumption of the share buyback programme, with £196 million having been spent since February, resulting in a new threshold of £131 per share being established for any further purchases. Instead, the pendulum has swung to the dividend, which including specials is currently running on an attractive 5% yield. Within this manoeuvre, the group has returned to a rarely used but previously common approach on its special dividend with the issue of “B” shares, which can be more tax efficient for investors. 

The shares have taken a rare breather over the last month, having declined by 9% following wider market weakness as the inflationary impact of higher energy prices threatens to increase input costs as well as crimp consumer demand. The group, which has a 6% of overall sales exposure to the Middle East, has responded to the threat by setting aside £15 million for additional costs, which assume that the conflict lasts no longer than three months, although guidance is unchanged since the figure will be offset by savings elsewhere. Next is nonetheless mindful that should the conflict exceed three months, some suppression of sales would inevitably follow.

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However, this has done little to derail the group’s progress overall, which has seen a 23% increase in the share price over the last year, as compared to a gain of 16% for the wider FTSE100 index. In addition, a rise of 80% over the last three years is a considerable achievement given the traditional restraints which retail stocks face. Of course, 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.

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 still continue to do so at their peril.