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Next - guidance upgraded after strong Christmas sales

Next's sales during the Christmas period were better than expected.

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Next's sales during the Christmas period were better than expected. In the nine weeks to 30th December, full price sales were up 4.8% compared to last year. Retail sales drove most of this uplift, with consumers showing strong demand for cold weather products in December. These figures exclude Joules, which Next acquired a 74% stake in during November 2022.

As a result of strong festive sales, the group upgraded full year profit before tax guidance by £20m to £860m, representing a 4.5% increase on last year.

After paying dividends, Next plans to return £220m of surplus cash to shareholders through share buybacks next year. This figure could be lower if the group decide to make further investments.

Looking to the following year, Next expects to pass cost price inflation of 6-8% onto customers through higher selling prices. Despite this, next year's profit before tax is still expected to fall to £795m, a 7.6% drop compared to the current year. This is largely a result of expected wage inflation and higher energy costs.

The shares were up 6.3% following the announcement.

View the latest Next share price and how to deal

Our view

Next had plenty to cheer about this Christmas. Strong trading over the festive period led the group to upgrade its full-year profit guidance.

But it's important to not lose sight of the very real challenges ahead. Soaring inflation means the cost-of-living crisis looms heavy over the group's customer base and regardless of management's best efforts, it's likely to squeeze margins.

Add to that the ongoing structural decline of bricks-and-mortar shopping, and you have a very challenging environment. 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 tougher conditions.

To cope with its own rising costs, Next is raising prices. But with the group planning to pass higher costs of 6-8% straight through to consumers next year, we question whether sales will remain robust. The group's position as a middle-of-the-road retailer means its customers could slide down the value chain rather than fork over a little more.

Online sales growth is also starting to normalise after exceptional pandemic-fuelled growth. While the group's said the customers it picked up during the pandemic have been sticky, online sales are likely to keep ticking lower in the short term.

The rapid growth in online and distribution services mean 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.

A hugely reduced debt pile allows some breathing room to navigate these challenges. It also feeds into the group's ability to pay dividends and execute share buybacks. However, particularly given the rising risks within the sector, no dividend is ever guaranteed.

Next's always been a top dog in the retail industry. But the rapidly deteriorating landscape has set the group off balance. The group could be in for a tough few years if its growth plans are derailed by challenges in the industry. This concern has been reflected in the group's valuation, with shares changing hands below the 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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 5th January 2023