Next (LON:) has done it again, breezing past its own estimates, which has led to yet another profit upgrade for the year as a whole.
Full price sales for the second quarter spiked by 9.2%, materially ahead of the group’s 4% estimate, leading to growth of 7.7% for the half-year so far. This translates to £70 million of additional sales, with £19 million coming from the UK and £51 million from overseas, with the group attributing the outperformance to warmer weather, the release of some pent-up demand in the Middle East and Northern Europe after a subdued first quarter, and a higher profitable marketing spend.
The group will be mindful of the continuing challenges in the physical retail space, where store sales fell by 1.7% over the six months. However, this was more than offset by strength elsewhere, with UK online growing by 7.4% in that period, and international online by 23.9%, with the latter also reaping the benefit of improved stock availability and more profitable marketing expenditure and both outpacing previous upgrades. In addition, much has been made across the sector of the inflationary impact of higher energy prices from the current conflict, which threatens to heighten 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 £47 million for additional costs, although the figure will be offset by savings and price increases elsewhere. Next is nonetheless mindful that should the conflict carry on for an extended period, some suppression of sales would inevitably follow.
Nonetheless, the numbers once more 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 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.
The upgrades to Next’s forecasts for the year ride on the coattails of the group’s unswerving momentum. Full-price sales are now expected to rise by 6.3% versus a previous estimate of 5%, total sales by 6.6% (4.6%), with pre-tax profit now pencilled in at £1.24 billion (£1.22 billion). Meanwhile, shareholder returns remain another major investor attraction, swinging between share buybacks or special dividends depending on the level of the share price. At present, the share buyback is effectively on hold given the group’s new threshold of £135 per share before continuing with the programme. As such, the pendulum has swung to the dividend, which, including specials, is currently running on an attractive 4.2% yield and the balance of excess cash will find its way back to shareholders via either route depending on the share price.
As one of the best-run and most respected stocks within the , 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. Yet even prior to another warm round of applause in opening trades, the shares had seen a 22% increase over the last year, as compared to a gain of 19% for the wider FTSE 100.
In addition, a rise of 113% over the last three years 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. Indeed, and long overdue it may be, but the recent upgrade of the market consensus to a buy reflects that investors have finally awoken to the singular strength of this slick and well-regarded company.