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Next - strong Christmas trading leads to profit upgrade

Next's full-price sales were up 5.7% in the nine weeks to 30 December, ahead of the group's 2.0% growth expectations...

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Next's full-price sales were up 5.7% in the nine weeks to 30 December, ahead of the group's 2.0% growth expectations. This was driven by 9.1% growth in its Online channel, with much more modest growth from its Retail stores.

Full-year pre-tax profit guidance has been upgraded by £20mn to £905mn. Full-year net debt is expected to fall from £797mn to around £700mn, excluding lease liabilities.

For the upcoming 2024/25 financial year, Next expects pre-tax profit to rise to around £940mn, including the negative impact of non-cash accounting charges from its recent acquisitions. Net debt is expected to fall further to around £625mn.

The shares rose 5.4% following the announcement.

View the latest Next share price and how to deal

Our view

Next's Christmas trading update gave investors plenty to be jolly about, with full-price sales well ahead of group expectations. Successfully keeping full-priced sales front and centre to avoid discounts is one of the main reasons Next boasts some of the best margins in the sector.

The Online division continues to be the main driver of growth, with sales through this channel rising at near double-digit rates. This division accounted for more than 50% of group sales back at the half-year mark, and we're pleased to see that increased warehouse space and operational tweaks are helping to iron out some of the problems of the past. There's still some work to be done to improve reliability and efficiencies further, but we're encouraged by the progress so far.

The online focus has helped Next grow its brand in overseas markets too. Sales abroad were up 18% in the first half, with net margin doubling to 14%. It's still a relatively small slice of the pie at the moment, but overseas markets offer huge growth potential and it's an exciting prospect if Next can execute well here. Although, nothing is guaranteed.

Next still has a strong high street presence though. 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 if they arrive.

But it's important not to get too carried away. Although the economic headwinds may be easing it's still tough out there. Consumers' budgets remain tight, meaning they're unlikely to splash out on a full new wardrobe anytime soon. And despite multiple guidance upgrades, full-year pre-tax profits are only expected to be slightly up on last year, highlighting just how tough the retail sector can be in times of economic uncertainty.

The balance sheet looks in good shape, with debt levels trending in the right direction. The group plans to return around £525mn back to shareholders through dividends and share buybacks in the upcoming 2024/25 financial year. And despite the FatFace acquisition, market forecasts suggest these are currently covered by cashflows, but no shareholder returns are 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 in line with its long-term average but further ups and downs could be in store 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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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: 4th January 2024