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Next - strong Q3 sales, but guidance unchanged

Nicholas Hyett, Equity Analyst | 3 November 2021 | A A A
Next - strong Q3 sales, but guidance unchanged

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Next plc Ordinary 10p Shares

Sell: 8,412.00 | Buy: 8,416.00 | Change 200.00 (2.44%)
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Full price sales in the 13 weeks to 30 October were 17.0% ahead of 2019, with sales in the last five weeks up 14%. That reflects very strong online growth during the quarter, up 40.0%, offset by a 6.1% fall in Retail sales. The business saw particularly strong growth in third party brands sold through the Next website.

However, management are maintaining guidance for fourth quarter sales growth of 10% compared to 2019. Slower fourth quarter sales reflect diminishing pent up demand, supply disruption limiting stock availability and inflation impacting consumer spending.

Full year profit before tax is still expected to come in at £800m, as investment in digital marketing and increased airfreight costs offset higher sales.

Next shares fell 2.8% in early trading.

View the latest Next share price and how to deal

Our view

Full year expectations remain unmoved, despite a strong third quarter and string of upgrades. That's disappointed the market.

Fourth quarter sales growth is set to slow, albeit remaining impressive. This largely just reflects the softening of pent up demand from last year. That's not a major issue - but the group has also flagged supply chain disruption and potential softening demand as inflation starts to bite. Both of which could be longer lasting problems.

The lack of profit upgrade despite better than expected sales growth also suggests the extra sales are just covering extra costs - eating into margins. That would add pressure if sales were to slip for any reason.

However, one swallow doesn't make a summer, and nor does one short outlook statement make a turn in the economic cycle.

Online results remain strong, and while retail sales are down on pre-pandemic levels, the last 18 months have really just accelerated pre-existing trends. Next's superior online operations meant it was able to attract new customers over lockdowns, and early signs suggest they're sticking around.

The group's also leveraging its strong online capabilities by helping other retailers boost their own digital performance. The third-party brand LABEL product is a lower-risk and high return area of business, which could translate into an impressive long-term source of growth.

Making the most of the online opportunity does mean capital expenditure's on the up. 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. And because Next's online business is more mature than a retailer starting digital operations from scratch, margins are higher and growth shouldn't be quite the same drag on profits.

We think managed decline is the order of the day in retail. 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 and should allow it to make the best of a tough market.

A hugely reduced debt pile - forecast to fall by over £500m at the full year - also eases concerns over financial health, and allows Next breathing room while it navigates changes in the industry. That may come in useful as industry-wide supply chain disruption disrupts the peak festive season.

In general, Next looks pretty well set at present, with high customer retention, mushrooming online sales and growth opportunities. Something of a rarity in retail.

Next key facts

  • Price/earnings ratio (next 12 months): 15.1
  • Ten year average Price/earnings ratio: 14.0
  • 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.

Register for updates on Next

Half Year Results (29/09/21)

Total group sales rose 7.6% to £2.2bn compared to 2019. That was entirely driven by online sales. Pre-tax profits were up 5.9%, reaching £346.7m.

Full price sales in the first eight weeks of the second half were up 20% on 2019, compared to second-half guidance of 6% growth. As a result, Next is upgrading guidance for the fourth time this year. It expects full price sales to rise 10% for the full year, while pre-tax profits guidance has also been upped by £36m to £800m.

Full price sales performance was boosted by pent-up demand following lockdowns in spring, plus warm weather in June. The group estimates about £75m of sales were lost in the 10 week lockdown, knocking £20m off profits overall as some sales shifted online and return rates fell.

Online full price sales rose 55% to £1.4bn, with double digit growth from NEXT Brand, third party LABEL business and overseas online. Next thinks there is much less physical retail competition for its LABEL UK business. The group also saw good results from its new Total Platform, which allows other retail brands to use Next's technology, warehousing, logistics and other infrastructure, for the benefit of their own online business. Six brands are signed up to Total Platform: Childsplay Clothing, Laura Ashley, Victoria's Secret, Aubin, Reiss and GAP. Four are trading on the platform, the other two are expected to launch in the next year.

Retail sales are down 38% at £540.1m, largely because of lockdowns coupled with structural challenges on the high street. The average lease length on stores was 5 years, down from 5.5. Half of store leases will expire or break in a little over 4 years.

Stock levels are running about 12% lower than 2019, which is ''far from optimal''. However, sales aren't being too greatly affected - this could be because of a greater range of alternative options.

Interest income in the Finance business fell 11% to £119m, as people continue to pay off their balances faster. Net profits fell 13% to £66m.

Next discussed its outlook in great detail. It doesn't expect to attract as many new customers over the festive season this year, but believes overall customer retention trends are positive.

The group said ''generally, we have not experienced difficulties in recruiting staff, particularly in our stores'', but warned some deliveries may take longer to arrive as it heads into the peak Christmas period.

Cost inflation is running at about 2%, and this is expected to increase to around 2.5% next year.

Next is in the process of building a new warehouse to increase capacity in-line with the growing online business. Phase 1 is planned to be operational in October 2023 and will increase capacity by +45%. Phase 2, which extends the mechanisation within the new building, is expected to add a further +45%. In the meantime, the group's putting new measures in place to maximise capacity in the existing estate.

Summarising the challenges and opportunities ahead, the group said: ''The daunting fact is this: little other than outstanding execution and constant innovation, across the entire business, will enable us to maximise the ever-changing opportunities and challenges of an increasingly online world. It is a tall order, but we are in the fortunate position of having that chance.''

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.