First quarter full price sales were down 1.5% compared to pre-pandemic trading - Next had guided for these to fall 10%.
As a result, the group's increased its full year pre-tax profit expectations by £20m, to £720m. Sales guidance for the rest of the year is unchanged.
Most stores were closed for the first ten weeks of the quarter, and Next said the strong sales performance in the last three weeks is "due to pent-up demand", and is "unlikely to be indicative of demand for the rest of the year".
The shares were broadly flat following the announcement.
Next has done it again - upgrading guidance despite the current climate.
The beat has come down to a very strong online performance, especially in third party LABEL products, home and childrenswear. This means the vast majority of lost sales from store closures have been offset, leaving a sales gap so small you have to squint to see it.
The exceptional online business is a bonus during a pandemic, but also a long-term source of comfort. The pandemic has accelerated the shift to online, meaning a higher proportion of sales will continue to be digital, even when the world is back to normal.
Making the most of the online opportunity does mean capital expenditure's on the up. That could put cash flow under pressure, but it's the right move in our view. We're particularly intrigued to see what increased capacity will mean for Next's overseas markets. It's also worth remembering that because Next's online business is more mature than a retailer starting digital operations from scratch, margins are higher and expanding it shouldn't come with quite the same drag on profits.
As we all know, Next is still a bricks and mortar retailer at its heart, so the stores need to be looked at too.
We can't deny the retail landscape is incredibly tough at the moment, and the structural decline in high street footfall is a problem, even for Next. We wouldn't be surprised to see the store estate shrink in the coming years as the group grapples with changes in the industry.
But Next is in a better position than many. Next's shops typically have shorter, and more favourable leases than peers, and are more focussed on out of town retail outlets that have been faring better. This gives the group extra flexibility. Meawhile a dramatically reduced debt pile allays any lingering fears about the group's financial position.
The near-term remains uncertain for Next. Especially in the smaller finance business, where lower consumer credit spending is denting interest income. That's unlikely to change any time soon. In our view, the long-term attractions are intact. Next is one of the best placed retailers, and we think it can come good on its plans. That's reflected in the share price valuation though, which is a little way higher than the ten year average.
Next key facts
- Price/Earnings ratio: 17.9
- 10 year average Price/Earnings ratio: 13.7
- Prospective dividend yield (next 12 months): 2.2%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
First quarter trading details (figures are compared against 2019 levels)
Full price sales, excluding interest income from Next's finance business, fell 0.6%. The group was able to recoup the majority of lost sales from store closures because of a strong online performance from third party LABEL sales, childrenswear and Next Home. These were up 67%, 2% and 12% respectively.
In the three weeks since shops have reopened, total full price sales have risen 19%, with the week commencing 25 April up 26%. Full price like-for-like sales are currently up 2% in store, and 52% online.
Sales are expected to moderate in the coming weeks. The group still predicts a 20% fall in Retail sales and a 24% rise in Online sales for the full year.
Income from interest payments in the finance business (where customers pay using credit), fell 12%, in line with expectations. Next still expects this to be down 8% for the full year, reflecting lower credit sales and the fact customers are paying their bills faster.
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