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Next - upgraded forecasts

George Salmon | 25 September 2018 | A A A
Next - upgraded forecasts

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Next plc Ordinary 10p Shares

Sell: 7,800.00 | Buy: 7,804.00 | Change 22.00 (0.28%)
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Next's first half results show total sales rose 3.9% on last year to £1.9bn, with NEXT Brand full price sales up 4.5%. Operating profit rose 1.6% to £331m, with share buybacks helping earnings per share rise 4.9%.

These results are ahead of previous guidance. Therefore Next has upgraded profit forecasts by £10m and now expects pre-tax profit to be broadly in-line with last year's £726.1m, with earnings per share up 5%.

The shares rose 8% on the news.

The ordinary interim dividend has increased 3.8% to 55p per share.

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Our view

Next enjoyed a bumper start to the year, but has only now revised guidance. That's because it wanted to make sure a strong end to the half wasn't just customers following the sun with their purchases.

That's not proven the case, and post-heatwave trading has remained robust. Still, Next remains cautious. We've no problem with that - it's better to under-promise and over deliver than vice-versa.

The group's also aware it'll take more than a searing summer to cancel out the longer-term challenges facing the retail sector.

Extra online competition and challenging economic conditions have been eating into profits, while the group's half year results devote a chunky ten pages to the uncertainty around Brexit.

However, recent updates have an undertone of cautious optimism. Wider economic uncertainty means Next may not be out of the woods yet, but there's at least reason to think it might be able to see the gaps in the trees.

The Online business has been flying since the group splashed out on a revamp of the website and app, and while sales in the Retail division are still in decline, the group's sticking to expansion plans.

That's because landlords are willing to offer less onerous and more flexible terms, so positive returns are possible even if like-for-like sales keep falling. It also shouldn't be forgotten the store estate is crucial to the click-and-collect service, which accounts for about half of online sales.

We like this level-headed assessment, although of course opening up new space in such an unfavourable environment is not without risk.

The shareholder returns policy also strikes us as sensible, and reinforces our view of Next as one of the UK's better-run retailers. The group seeks to allocate surplus cash flexibly and efficiently. This means buying back its own stock when management believe it worthwhile, and paying special dividends when the price is judged to be too high for buybacks.

The shares offer a prospective yield of just over 3% for next year, and trade on 11.6 times expected earnings per share, slightly below the longer-term average.

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Trading details

Retail sales (from Next's high street business) fell 6.9% to £925m. Falling like-for-like sales, combined with the relatively high fixed cost base, meant margins fell 1.7 percentage points to 7.9% despite some operational improvements around purchasing and stock management. The double whammy of fewer sales at lower margins led operating profit down 23% to £73m.

Online sales were up 16.8% to £892m, with growth in Next's own lines, third party brands and the overseas business. With marketing costs well controlled and fewer items sold at discount, operating margin increased to 18.3% from 17.6%. As a result, profit rose 21.2% to £163m.

The remaining £122m of sales came from the Finance division, which represents the interest charged to customers on credit purchases, and was previously included within Online. Net profit fell slightly to £57.9m, but is expected to increase almost 10% to around £123m over the year as a whole.

Looking ahead to the full year, Next expects to add around 42,000 square feet of sales space. Subject to lease renewal negotiations, a further small increase is expected in 2019/20.

The group will also invest around £45m in warehouse efficiency, as part of wider plans to invest £200m over the next four years.

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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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.