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Next - profits rise but outlook murky

Next's full-year sales rose 8.4% to 5.1bn pounds.

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Next's full-year sales rose 8.4% to £5.1bn. There was growth in retail and finance sales, up 30% and 10%, respectively, while online sales fell by 2%.

Pre-tax profit rose 5.7% to £870m as higher profits in the retail and finance divisions more than offset a 23% decline in online profitability.

Free cash flow including lease-related payments fell from £464m to £363m. Net debt including leases rose 9.8% to £1.8bn.

A final dividend of 140p per share has been announced, bringing the year's total to 206p. Share buybacks for the year totalled £228m.

Next expects full-price sales to decline by 1.5% for the year ahead and pre-tax profits to fall to £795m.

The shares fell 6.4% following the announcement.

View the latest Next share price and how to deal

Our view

Next delivered full-year profits ahead of guidance. That was thanks to increased retail sales which are typically higher margin, as well as a strong end of season sale.

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.

To cope with its own rising costs, Next is raising prices. With selling prices expected to be hiked by 7% in the first half of this year, we're cautious as to 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 have started to retreat after a period of 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.

Add to that the ongoing structural decline of bricks-and-mortar shopping, and you have a very challenging environment. However, the silver lining here is that 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.

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 higher corporate tax rate comes into play in April and will add to the group's list of challenges. Net debt is expected to rise further as the group plans to maintain its dividend flat at 206p per share, while still completing £220m of share buybacks. But given the rising risks within the sector, remember that shareholder returns aren't guaranteed.

Next's always been a top dog in the retail industry, but it's tough sector to be in during an economic downturn. It could be a tough few years for Next if its growth plans are derailed by challenges in the industry. This concern is 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
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: 29th March 2023