First quarter sales of Next branded stock rose 6% ahead of expectations, with positive implications for full year profits.
The strong performance was driven by the recent spell of warm weather, and Next does not expect it to be replicated across the rest of the year.
The shares rose 6.3% in early trading.
It's easy to see why Next says 2017 was the most challenging year since the early 1990s. A toxic combination of heightened online competition and more challenging economic conditions have been eating into profits.
However, recent updates have provided investors with reasons for optimism. Long-serving chief executive Simon Wolfson expects one or two of the headwinds facing the sector to ease in the coming year.
Online trading has been particularly encouraging. While competition remains tough, the division has been turning in better performances since the rise of online-only players like Boohoo and ASOS sparked a revamp of the website and app. Successfully implementing these changes has enhanced our already positive opinion of management.
We've long been fans of Next's strategy on shareholder returns. Historically, the group has only bought back its own stock when management believe it worthwhile, and has paid out special dividends when the price is judged to be too high to merit a buyback. That makes the decision to earmark next year's £300m or so of surplus cash to buybacks a notable one. Management clearly think the shares have potential.
Despite declining sales in the bricks-and-mortar business, it's not all doom and gloom. The group says it can still generate positive returns from its store estate, even if like-for-like sales keep falling. It's also highlighted other benefits of physical stores, such as distribution savings and the ability to offer click-and-collect.
Despite these positive indications, there are headwinds. The UK consumer is under pressure, and other leisure activities are attracting cash away from clothes retailers. There's no getting away from the negative impact a collection of ever-emptier shops will have on the group's image.
Clearly then, Next is not out of the woods. But there's at least reason to think it might be able to see the gaps in the trees.
The shares offer a prospective yield of 3% next year, and trade on 12.5 times expected earnings per share, bang in line with the longer-term average.
First Quarter Trading Update
The strong sale performance was led by online, where sales grew a massive 18.1% in the quarter. Meanwhile sales continued to fall on the high street, and were 4.8% lower than last year - although this is an improvement on recent history.
However, with results driven by unusual weather conditions, Next expects sales growth to moderate in the remainder of the year. Sales are expected to grow by 1% across the rest of the year, resulting in full year growth of 2.2%.
The stronger than expected start to the year has led the group to increase full year profit before tax guidance from £705m to £717m. Full year growth in earnings per share is also expected to be higher, at 3.7% compared to 1.4% at the start of the year.
The group still expects to return £300m of surplus cash through share buyback.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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