Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Next - sales slow but guidance remains

In the thirteen weeks to 29 October full price sales were down 0.1% versus last year.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

In the thirteen weeks to 29 October full price sales were down 0.1% versus last year, reflecting lower online sales which were offset by improved in-store sales. Including the benefit of interest income, which is generated from Next's credit business, sales rose 0.4%, slightly ahead of internal expectations. In the last 5 weeks, full price sales rose 1.4%, benefitting from a strong week at the end of September as the weather grew cooler.

Full price sales are still expected to fall 2% for the remainder of the year. But Next still expects profit before tax to be 2.1% higher versus last year, at £840m.

The shares rose 2.5% following the announcement.

View the latest Next share price and how to deal

Our view

Next had a decent third quarter. Following a couple of guidance downgrades already this year, it's good to see the goalposts haven't moved again.

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 raised prices. But the group's position as a middle-of-the-road retailer means its customers would rather slide down the value chain than fork over a little more. The result is a slowdown in full-price sales that looks unlikely to let up until consumer confidence starts to return.

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.

Overseas performance has been a little weak of late, an area of opportunity for Next. Margins in this part of the business have fallen almost 10 percentage points over the past three years due to rising duty charges and delivery cost inflation. Some of that's to be expected when breaking into new markets, but the group's 7.4% margins are well below its 10% target. The crumbling pound will make it easier for the group to recoup rising costs without the need for price hikes and the group's also planning to improve the mix of products sold abroad to improve profitability.

A hugely reduced debt pile allows some breathing room to navigate these challenges. It also feeds into the group's ability to pay dividends - the group's returned to its normal dividend policy this year. 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 well 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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 2nd November 2022