Next's half year results show further solid progress being made. NEXT Brand sales were up +3.3% and Total sales (including NEXT Franchise sales) were up +2.7%. Profit before tax increased by +7.1% and earnings Per Share (EPS) rose by +8.0%, boosted by share buybacks last year. An interim dividend of 53p has been declared, an increase of 6% on last year, which is in line with the group's expectations for full year growth in EPS. The shares were 2% higher in early morning trading.
Retail sales were up +0.2%. Full price sales were up +0.8% and net new space contributed +2.2% to growth. Operating profit rose by 5.7%, due to higher gross margins and lower central overheads. Management have conducted a detailed study on the impact of the Living Wage, which comes into effect in April 2016 and have concluded that the cost is not immaterial but can be absorbed by modest price increases, which are unlikely to have a material effect on trading performance.
NEXT Directory sales grew by +8.2%, with full price sales growing +7.5%. Directory sales in the UK grew by +6.3% and overseas by +24.1%. Operating profit rose by +7.0%.
Next is our favourite UK retail play; it is very exposed to online sales, with its Directory business earning more than the retail stores these days. International online sales are growing fast and operating profit margins of 20% mean that cash flow is strong.
The stores are leasehold, which allows Next to expand without needing too much capital. It has enhanced earnings growth for shareholders by using excess cash flow to buy back its own shares, allowing future earnings to be spread amongst a smaller number of remaining shares. Since the turn of the century, the number of shares in issue has more than halved. Throw in the underlying growth in the business and the outcome has been that Next has compounded earnings and dividends per share at a double-digit pace, driving great stock price performance over a long period.
Investors get an unusual outcome with Next; if the price is high, the yield goes up, as special dividends come their way. A lower price leads to buy-backs, which hopefully lead in time to a higher share price, but the yield on the stock drops in the short term, because the special dividends dry up. Recently, special dividends have been the norm. On Next's current view, buy-backs do not make sense unless the share price dips back toward £69.
The shares have risen by 16% year-to-date and now trade on a price to earnings ratio (P/E) of 17.5x. The dividend yield for 2016, including those special payments, is 4.6% (variable and not guaranteed). Next is an extremely well run business with a proven ability to grow shareholder value. Over the long run, we believe this will stand investors in good stead; in the near term the company should benefit from lower oil prices and rising wages, which puts more money into consumers' pockets.
Special dividends and share buybacks:
Next's share price remained above the group's buyback price limit of £69.62 during the period, so no shares were repurchased. Next intends to return surplus cash to shareholders through special dividends, with the next payment of 60 pence per share scheduled for 2 November 2015.
The group's full year guidance remains unchanged from the July trading update. Sales growth in the second half is expected to pick up to between +3.5% and +7.5%, reflecting softer comparatives (last year was unusually strong in the first half and much weaker in the second half, with autumn sales adversely affected by unusually warm weather).
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