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Next - trading as expected

Full price sales rose 21.3% in the first quarter...

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Full price sales rose 21.3% in the first quarter, as expected. That was driven by increased physical store sales, which offset an 11% decline in Online sales. This largely reflected shifting consumer behaviour following last year's lockdowns.

Compared to pre-pandemic levels, full price in-store sales fell 8%, while Online sales were up 47%.

The group's still expecting full year profit before tax of £850m, up 3.3% from last year. This assumes full price sales growth of 5%.

The group's spent £107.5m on share repurchases so far this year and £20m on acquisitions, including a minority stake in JoJo Maman Bebe. That leaves just under £100m in forecast surplus cash to be spent on shareholder returns or further investments.

Next shares were broadly flat following the announcement.

View the latest Next share price and how to deal

Our view

Next's humming along as expected, albeit the bar was lowered considerably earlier this year. Still, it's good news to see that overall full priced sales are on the up as shoppers return to more normal habits.

Next's well established online operations gave it a boost during lockdowns and now that people are out-and-about in-store sales are gaining traction. That's come at the expense of Online, which is to be expected, but e-commerce sales appear to have rebased at a higher level.

This is in part due to growth in its third-party LABEL operations, which charge a commission for sales through the Next platform. These sales are lower margin, but they also come with very little risk. The group's also leveraging its strong online capabilities by helping other retailers boost their own digital performance through Total Platform. The addition of Reiss last year and JoJo Maman Bebe more recently should help this part of the business double its profits - though it remains only a small slice of the overall pie.

Making the most of the online opportunity does mean capital expenditure's climbed. We'd been hoping this will help Next gain traction overseas, so it was disappointing to see expected overseas sales growth excluding Russia and Ukraine revised lower. This shouldn't have a material impact on overall sales trends, but it does raise questions about the potential for growth abroad.

Inflation adds another significant obstacle to the mix. The group's raising prices to cope with increasing input costs, with an 8% hike expected in the second half of this year. That's a big ask and Next's middle-of-the-road prices mean it's customers could start to slide down the value chain to lower-cost competitors.

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.

A hugely reduced debt pile allows some breathing room to navigate changes in the industry, including freight and wage inflation. A strong balance sheet also feeds into the group's ability to pay dividends - the group's planning to return to its normal dividend policy this year. However, no dividend is ever guaranteed.

In general, Next is a bit of a rarity in retail. With growth avenues like LABEL and Total Platform ahead and solid finances, it's well placed among peers. But, retail is likely to see some turbulence ahead as the environment becomes more challenging, and Next won't be immune.

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.

Full Year Results (24 March 2022)

Full year revenue rose 30.9% to £4.6bn, helped by a 32.4% increase in full price sales and growth in online. Combined with lower sales and finance costs meant profits more than doubled to £823m, and were up 10% compared to pre-pandemic levels.

Slower growth in some overseas markets and the closure of its Russian and Ukrainian websites led management to reduce its sales and profit guidance by 2% and 1.2% respectively. The group's seen a stronger-than-expected return to shopping in-store, which is expected to reduce online sales.

A 127p ordinary dividend was announced. Next aims to return to its pre-pandemic ordinary dividend cycle this year.

Full price sales in the Retail business fell 23% compared to 2019, though that improves to -5% on a like-for-like basis. Together with increased freight costs and wage inflation, this meant profits declined 54% compared to pre-pandemic levels to £107m. The group reduced the number of stores in operation by 14 to 477.

Online sales rose 31.1% to £3.1bn, 44.6% ahead of pre-pandemic levels. They now make up 64% of total group sales. Full price online sales were up 47% versus 2019, helped by strong growth in the group's third party Label sales. Profit margins fell slightly to 19% from 19.1% two years ago reflecting a higher proportion of less profitable LABEL and overseas sales as well as increased labour, IT and freight costs. Despite this, profit rose 43.4% to £588.5m over the same period.

Finance, where Next charges interest on store credit accounts, saw profits fall 3.3% to £141.8m compared to pre-pandemic levels, reflecting lower customer balances. However, trends are improving.

In February, the group added its largest client to date, Reiss, to its Total Platform business, which manages online growth for third-party clients. This part of the business brought in £10.3m in profits, which is expected to nearly double next year.

Surplus cash fell from £521m to £363m, reflecting the investment in Reiss, the construction of a new warehouse, land acquisitions and growth in Finance customer balances. Net debt fell slightly from £610m to £600m.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 5th May 2022