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Next - sales better than expected

Sophie Lund-Yates | 3 January 2020 | A A A
Next - sales better than expected

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Next plc Ordinary 10p Shares

Sell: 5,478.00 | Buy: 5,484.00 | Change 80.00 (1.48%)
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Full price sales rose 5.2% in the fourth quarter, 1.1% ahead of Next's forecasts. The group now expects pre-tax profit for the full year to be £727m, compared to guidance of £725m given in October.

Due to the new timing of tax payments, Next expects net debt to increase. In response, the group said it will reduce returns to shareholders by £35m next year, and the following year.

The shares were little moved following the announcement.

View the latest Next share price and how to deal

Our view

We think Simon Wolfson's Next is ahead of the pack.

The group's been 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. The online business continues to grow rapidly as a result and these days it sells third party brands on the site too, which boosts sales further.

Interestingly, around half of online sales complete through click & collect, and over 80% of returns are made 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 fall, Next will remain a comfortably cash-generative business. So far the group's proven adept at securing favourable terms from landlords, but there's no guarantee this will continue.

Next needs to make sure it strikes the right balance between opening new space to support growth, and not having too many shops. Too much space could be a problem if conditions on the high street get materially worse, although we think management have done well so far.

Something that sets Next apart from some of its neighbours, is its finance business - offering people the option to buy today and pay tomorrow. Interest income is growing steadily, providing an extra revenue stream.

The shareholder returns policy also strikes us as sensible. 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.

The £70m reduction in shareholder returns over the next couple of years might sound severe, but we think it's the right thing to do for now - and there's still a generous buyback on the cards. Plus, at the time of writing, the stock still offers a prospective yield of 2.6% over the next twelve months.

The shares trade on 14.6 times expected earnings, 15.6% above their long-term average.

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Fourth quarter trading details

In-store sales declined 3.9%, which reflects a 4.6% fall over the year to date. In the online business, sales rose 15.3% in the quarter, which meant overall product full price sales were up 5.3%.

Next believes the better than expected sales performance reflects a much colder November compared to last year, as well as improved stock availability.

The finance division, where Next customers pay using credit, saw interest income rise 3.4%. For the year as a whole this was up 7.8%.

Looking ahead to next year, Next expects full price sales to rise 3% and a pre-tax profit of £734m, ahead of analyst's forecasts of £729.3m.

The group's aiming to return at least £145m to shareholders in the first half of next year via share buybacks. In the event that this amount of shares cannot be purchased, the balance will be given as a special dividend.

Find out more about Next shares including how to invest

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 disclosure for more information.