Next (LON:NXT) is a master of the ability to under promise and over deliver, and this update is the latest illustration as it raises its profit guidance for the fifth time this financial year.
The revised pre-tax profit estimate of £905 million adds £20 million to the number guided in November, and puts further light between the forecast and the previous year’s result for the full-year of £870 million. Nor does the optimism for prospects stop there, with initial guidance for the next financial year estimating pre-tax profit of £960 million, a further increase of 6%, or 5% when accounting for some accounting changes which the group is making on how to treat subsidiary sales and profits.
The profit upgrade follows a better than expected performance in the months of November and December, where full price sales rose by 5.7%, as compared to the 2% which Next had previously forecast. Online sales remained the major contributor to the performance, adding 9.1%, while retail made a more pedestrian contribution of an additional 0.6%. Work continues apace to increase the reliability of distribution for the online business, which is already providing some cost savings in addition to improving the customer experience. Indeed, an early indication was during the end-of-season sale, when improved control resulted in surplus stock dropping by 12% versus the previous year.
This also augurs well for the overall strategy, including the opportunities arising from the enhanced Total Platform, extending its overseas reach and new product offers arising from its third party and licensing capability. All are largely dependent on the technology which it has been busy developing, enabling for example the acquisition of new brands via its website which, although lower margin, are also significantly lower risk.
The outlook for next year also guides for an increase of 2.5% in full price sales, a number which is boosted to 6% when including the subsidiary businesses which are clearly beginning to make a more meaningful contribution to overall profitability. Notwithstanding the potential bumps in the road, Next has observed that the consumer environment looks more benign than it has done for several years and an ability to pass on marginal price increases if necessary is proof of its established position.
That being said, the retail industry is rarely given a clear run and events over the next year could yet provide more obstacles. Any deterioration in the UK economy which results in higher unemployment and a further strain on disposable incomes would be a clear headwind, as the lagging effects of interest rate rises continue to wash through. In addition, the current difficulties around the Red Sea and the Suez Canal could impact the supply chain of they persist. More positively, Next remains on the alert for potential acquisitions as some of its rivals continue to struggle, cost inflation is at last falling to manageable levels and wage rises are currently keeping pace with inflation more generally.
The net effect of Next’s firm hand on the financial tiller has also resulted in surplus cash of £100 million over its September guidance, which should enable the shareholder return policy to continue unabated. The dividend yield of 2.6% is not the most punchy in the premier index, but Next’s policy is more nuanced and in the absence of further investments it expects to be able to initiate a share buyback programme of £275 million. At the same time, net debt has fallen from £797 million to £700 million, with a further potential reduction of 10.7% next year leaving the number at £625 million.
In all, Next has shown its mettle once more in a famously competitive environment, in which it is seen as something of a linchpin. Its share price performance has also defied the odds which tend to follow the retail sector, having risen by 35% over the last year, as compared to a gain of just 1.3% for the wider FTSE100. The warm initial price reaction to the update could initiate some upgrades to a market consensus which has yet to break out of its range for a sustained period of time. Indeed, the general view of the shares as a hold, albeit a strong one, has tended to underestimate the strides which the company has been making.
