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Next - trading much better than forecast

Sophie Lund Yates (Equity Analyst) | 21 July 2021 | A A A
Next - trading much better than forecast

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Next plc Ordinary 10p Shares

Sell: 7,844.00 | Buy: 7,850.00 | Change -262.00 (-3.23%)
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Next said trading over the last 11 weeks has been 'materially ahead' of expectations, and is upgrading full year underlying profit guidance by £30m to £750m.

Total full price sales, which includes interest income from the credit business, rose 7.8% in the first half, and 18.6% in the second quarter to 17 July. That reflects strong growth in homeware, third party brands and overseas online, which offset declines in the store estate.

The shares rose 7.8% following the announcement .

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Our view

It's getting to the point where we struggle to believe Next's estimates. It's upgraded guidance. Again. We've genuinely lost count of how many times that's happened.

Let's start with some of the big news. The group's announced a special dividend of 110p per share. A bricks and mortar retailer that feels comfortable enough to hand out surplus cash is something of a miracle in 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 and reduced capacity have been offset. 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. It will also add a layer of resilience should the rising number of isolation-orders get much worse.

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. Meanwhile 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, but that's reflected in the share price valuation, which is higher than the ten year average.

Next key facts

  • Price/earnings ratio: 15.2
  • en year average Price/earnings ratio: 13.8
  • Prospective dividend yield (next 12 months): 2.6%

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.

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Half year trading update

The stand out performers were UK NEXT-branded Home - up 25% - and Next's third party brands including Lipsy, which rose 66%. Elsewhere in the UK, NEXT-branded adult clothing and childrenswear fell 27% and rose 6% respectively. Total UK full price sales were up 2%.

The international online business saw sales rise 64%, which offset declines in physical retail of 54%.

The better than expected overall performance has been attributed to pent-up demand, nice weather, higher domestic spending because of less overseas travel, and customers having more savings.

Surplus stock levels were 4% down on a year ago, but still a bit higher than Next forecast.

While Next expects sales to calm down over the coming weeks, it has still raised its sales guidance from 3% to 6% for the second half.

Interest income from the credit business was in line with expectations, and fell 9%. Average customer balances were down 7%, reflecting customers paying down debts faster and reduced credit sales during the pandemic.

The group said "for the full year, surplus cash is forecast to be £240m. We plan to distribute this cash to shareholders through special dividends during the current financial year, the first of which will be paid in September."

Find out more about Next shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.