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Next - fashions itself a small profit upgrade

Next's second-quarter full-price sales rose by 6.9%. This was driven by 10.0% growth in its Online channel and a 2.2% rise in Retail...

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Next's second-quarter full-price sales rose by 6.9%. This was driven by 10.0% growth in its Online channel and a 2.2% rise in Retail.

The group was pleased with the end-of-season sale performance, and clearance rates were ahead of group expectations.

Full-price sales are expected to grow 0.5% in the second half, implying full-year growth of 1.85% to £4.7bn.

Full-year pre-tax profit guidance has been raised by £10m to £845m.

The shares opened flat following the announcement.

View the latest Next share price and how to deal

Our view

Next has got into a habit of beating market expectations on the upside lately, and today's second-quarter trading statement continued the hot streak.

Full-year pre-tax profit guidance got a small bump up. Increased online sales were the main driver, with sales in this channel rising at double-digit rates. However, Next has been cautious about how far to nudge up guidance. We like this prudence, which moves the odds in favour of more earnings surprises on the upside rather than disappointments as the year progresses.

But it's important not to get too carried away. Next has pointed to consumers' rising wages as a recent tailwind but expects this to be offset by inflation, which is proving stubborn. That means despite recent upgrades to guidance, analysts are still forecasting a low single-digit decline in operating profit for the year - reflecting some very real challenges ahead.

To cope with its own rising costs, Next has been raising prices. Selling prices are expected to be up about 7% over the Spring and Summer seasons. Next remains a go-to clothing retailer for when consumers have a bit extra to spend. Just how much real incomes are squeezed in the coming months will be a key metric to watch.

Next still has a strong high street presence and with over half of sales online, it's well placed to pivot towards the latest consumer preferences. 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.

The rapid growth in online and distribution services means operations aren't as efficient as we'd like. This does open the door for improvement though, and it's something Next's management has called out as an area of opportunity.

Growth in its third-party LABEL operations, which charge a commission for sales through the Next platform, is another bright light. With big names like Reiss and Gap now participating in the programme, opportunity lies ahead. These sales are lower margin, but they also come with very little risk.

This financial year the group plans to maintain its dividend flat at 206p per share, while still completing £220m of share buybacks. Analyst forecasts suggest these are covered by cashflows, but nothing is 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.

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: 3rd August 2023