Following better than expected trading, Next has upgraded guidance for the full year.
Sales guidance has increased from 1.7% to 3.6% growth, while profits are expected to be £10m ahead of previous expectations at £725m.
The shares rose 6.7% following the announcement.
Next's in-store sales are still going backwards, but overall sales are in positive territory. That's not something every retailer on the high street is managing.
That's because the company's own online business continues to grow rapidly. Next was able to capitalise on the shift to online shopping, thanks to its history as a catalogue company. Distribution infrastructure was already in place, and could be fired up quickly when e-commerce came knocking. These days it sells other third party brands on the site too, which boosts sales further.
Interestingly, around half of online sales completed through click and collect, and over 80% of orders returned in store. That means Next still sees a place for bricks and mortar, and is behind its strategy to keep opening new shops.
New leases are typically short, providing extra flexibility, while management stress testing suggests that even if in-store sales continue to plummet, Next will remain a comfortably cash-generative business. The success of that model leans on Next's ability to negotiate cheaper rents, and so far the group's proven adept at securing favourable terms from landlords, but there's no guarantee this will continue.
Customers also benefit from Next's finance business, which offers a buy today, pay tomorrow, model, and charges interest for the privilege. Interest income is growing steadily, and provides an extra layer of revenue that sets it apart from other clothing retailers.
The shareholder returns policy also strikes us as sensible, and reinforces our view of Next as one of the UK's better-run retailers.
It 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. Buybacks are the current preferred option - although the stock still offers a prospective yield of 3% next year.
The shares trade on 12.3 times expected earnings, almost bang in line with their long-term average.
Second quarter trading details
Within retail stores, full price sales declined 4.2% in the second quarter, and in-store sales are now thought to decline a total of 5.1% over the year, rather than 8.5% as previously thought.
The online division grew strongly, with full price sales increasing 12%. By the end of the year, these are expected to improve a total of 11%.
Interest income from Next's credit business also rose -up 8.3% - although growth this was below the 11.4% increase in Q1.
An improvement to total full price sales was driven by a less stock being discounted, as well as positive improvements to organic trading trends in May and June. Including the impact of marked-down items, total group sales were up 3.8%.
Earnings per share at the end of the year is now due to be 457.9p, compared to a previous expectation of 450.1p.
Next has completed £280m of its £300m share buyback programme.
Half year results are expected on 19 September 2019.
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.