Yet another set of next-level numbers has underlined the group’s unparalleled understanding of the market in which it operates and its ability to capitalise on new opportunities.
Next (LON:NXT) has increased its guidance for full-year pre-tax profit to £995 million, having only increased the figure from £960 million to £980 million last month. Estimated full price and group sales have also been upgraded to grow by 4% and 6.6% respectively, while net debt is projected to reduce further by £75 million to £625 million. Of equal importance, however, are the prospects for the group over the longer term as it continues to innovate, consolidate and grow its offering within a notoriously competitive environment.
The group had previously identified three major strands for growth in the form of its Total Platform, new brands and licences and Next overseas, all of which are showing signs of opening avenues to which the group was not previously exposed. Indeed, Next has recognised that its offering has changed over the years in a way which can best be appreciated only with hindsight. In terms of revenues, for example, the traditional retail business now accounts for just 30% of the group total, with online sales grabbing the lion’s share at 54%. The total platform business has now reached 10%,while the overseas offering is now growing apace, albeit from a lower base.
The overseas offering is one which holds up some interesting prospects. 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. Nearer to home, such as in Europe, the distance is less of an issue and so the group will retain more of a local approach. The general marketing spend to increase awareness further proves the group’s ambition. In 2020, overseas marketing spend of £8 million related to just 19 countries, whereas the latest number has revealed a spend of £41 million across 43 countries.
The online business is now central to the group’s fortunes and the results are equally encouraging. For this period, online full price sales grew by 8.4% and profit by 7.6%, while margin ticked higher to 16.1%, providing a win on multiple fronts. Marginal weakness in the Next brand, where sales dipped by just 0.9%, were largely down to some strong comparatives following a particularly warm summer last year. Even so, the group will undertake further detailed analysis to understand if there are any other causes of note. Nor will Next stand still, as it brings additional focus on the group’s warehousing capabilities as well as a new push through digital and marketing services.
More recently 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. For the half-year, full-price sales increased by 4.4% and group sales by 8%, leading to a jump of 13.6% in revenues to £2.86 billion. At the headline level, pre-tax profit came in at £452 million, representing an increase of 7.1% compared to the corresponding period.
The financial health of the company is another focus on which progress has been made. Quite apart from the improved guidance on the net debt figure, the cash generative power of the company has enabled the delicately balanced shareholder return programme to continue. Based on its own calculation, Next estimates whether excess capital is best deployed through either share buybacks or dividends. In this period, a marginal increase to the dividend leads to a projected yield of 2.1%, not traditionally one of the stock’s attractions. The total of share buybacks, by contrast, is expected to reach £306 million come the end of the year.
In all, the warm share price reaction to the numbers comes as little surprise and adds to a gain of 46% over the last year, as compared to a rise of 7.8% for the wider FTSE100 and of 78% over the last two years. Even at these levels the company is not stretched on a historic valuation basis, with the only downside being that such share price recognition has not been echoed by a market consensus which has not moved from being a hold for some considerable time. Even so, Next continues to defy any lingering doubts and the strength of its trading performance should rightly grab the headlines from the naysayers who continue to search for chinks in the armour.