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Next - profit guidance upgraded

Next issued an unscheduled trading update covering the past seven weeks.

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Next issued an unscheduled trading update covering the past seven weeks.

Full price sales were up 9.3% on last year, materially ahead of previous guidance for a 5% decline. The outperformance is being attributed to the sudden change in weather, as well as annual salary increases which have given consumers an uplift in real incomes.

Full-year profit before tax guidance has been upgraded from £795m to £835m.

The shares rose 4.9% following the announcement.

View the latest Next share price and how to deal

Our view

Lately, Next has got into a habit of beating market expectations on the upside. But it's important not to get too carried away. Despite recent upgrades to guidance analysts are still forecasting mid-single digit declines in operating profit for the year.

That reflects some very real challenges ahead. Next points to rising wages as a recent tailwind but expects this to be offset by inflation, which is proving stubborn. 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.

To cope with its own rising costs, Next has been raising prices. Selling prices are now expected to be up about 7% over the Spring and Summer seasons. 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.

That's not borne out as yet, and Next is still very much a go-to clothing retailer for the man in the street 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 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.

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 an economic downturn. It's weathering the storm admirably and looks well-placed to prosper when the cycle turns. That's reflected in a valuation climbing back towards its long-term average. While we don't see too much scope for disappointment in the short term, there may be some bumps 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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Article history
Published: 19th June 2023