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Next - announces acquisition of FatFace

On Friday 13 October, Next announced it had agreed to purchase British clothing retailer, FatFace, for £115.2m.

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On Friday 13 October, Next announced it had agreed to purchase British clothing retailer, FatFace, for £115.2m. The transaction is expected to be settled within the next few weeks, through a combination of cash and by issuing new equity shares of Next.

In the year to 27 May 2023, FatFace had sales of £282m and a pre-tax profit of £19.5m.

Around 40% of FatFace's sales come from digital channels, which are expected to be migrated to Next's Total Platform within the next year. The remaining sales come from its more than 205 retail stores worldwide. The FatFace brand is expected to continue trading from and developing its own retail store portfolio.

Next stated that the acquisition would not materially impact its underlying pre-tax profit or earnings per share (EPS) guidance for the current year.

The shares fell 1.1% on the day of the announcement.

View the latest Next share price and how to deal

Our view

Next's £115.2m acquisition of the UK fashion brand, FatFace, pales in comparison to Next's own valuation. But it does signal serious intent to develop and expand its Total Platform - a service which allows third-party retailers to make use of Next's online software and infrastructure. And despite the acquisition, Next says that full-year pre-tax profit guidance of £875m wouldn't be materially impacted.

Back at the half-year mark, we heard that an increase in full-price sales and a strong performance from the online division helped online profit rise at double-digit rates. Successfully keeping full-priced sales front and centre to avoid discounts is one of the main reasons Next boasts some of the best margins in the sector.

The online division accounts for more than 50% of group sales, and we're pleased to see that increased warehouse space and operational tweaks are helping to iron out some of the problems of the past. There's still some work to be done to improve reliability and efficiencies further, but it was pleasing to see the proportion of items delivered late in June was down 45% year-on-year.

The online focus has helped Next grow its brand in overseas markets too. Sales abroad were up 18% in the first half, with net margin doubling to 14%. It's still a relatively small slice of the pie at the moment, but overseas markets offer huge growth potential and it's an exciting prospect if Next can execute well here. Although, nothing is guaranteed.

Next still has a strong high street presence too. Its shops typically have shorter, more favourable leases than peers, and are more focussed on out-of-town retail outlets that have fared better. That gives extra flexibility and should allow it to make the best of tougher conditions if they arrive.

But it's important not to get too carried away. Next expects high levels of inflation will continue to weigh heavy on consumers' wallets over the second half. And despite multiple guidance upgrades, full-year pre-tax profits are expected to be broadly flat year-on-year, highlighting just how tough the retail sector can be in times of economic uncertainty.

The group plans to pay an interim dividend of 66p per share later this financial year, while also completing a further £52m of share buybacks. And despite the FatFace acquisition, analyst forecasts suggest these are currently covered by cashflows, but no shareholder returns are guaranteed.

Next's always been a top dog in the retail industry, but it's a tough sector to be in during times of economic uncertainty. It's weathering the storm admirably and looks well-placed to prosper when the outlook brightens. That's reflected in a valuation climbing back towards its long-term average but further ups and downs could be in store along the way.

Next key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 16th October 2023