First-half sales rose 9% to £3.5bn, supported by higher and more targeted marketing spend. Online International and UK sales grew 24% and 7%, respectively, partially offset by a small decline in UK Retail stores.
Pre-tax profit rose 11% to £569mn, driven by sales growth and improved operational efficiencies.
Free cash flow was flat at £0.4bn, as increased investment in property and infrastructure offset stronger profits. Net debt, including lease liabilities, rose from £1.5bn to £1.9bn.
Full-year guidance has been upgraded slightly, with sales now expected to grow by 7% to £7.5bn, and pre-tax profits to rise 8% to £1.3bn.
The group completed £355mn of share buybacks over the period and announced an interim dividend of 98p per share, up 13%.
The shares were up 2.3% in early trading.
Our view
Next continued to impress with better-than-expected half-year results. Favourable weather and effective marketing helped drive sales higher, leading to the group’s fourth profit upgrade this year. But management has become more cautious on the outlook for the UK, which could weigh on growth moving forward.
Strong demand in its online channel remains a running theme, and we continue to see it as the main growth driver. It already accounts for well over half of group sales, and expansion overseas is still in its early stages.
Europe accounts for the majority of its overseas sales and can be serviced quickly and cheaply from the UK. Sales in the Middle East continued to grow at double-digit rates, with a pullback in demand following the outbreak of the current conflict proving to be short-lived. Given the untapped size of these markets, there’s a big opportunity if Next can execute its expansion plans well.
Management nudged down UK sales expectations for the second half, reflecting growing caution around the consumer backdrop. The downgrade was modest and should be more than offset by higher prices, strong overseas growth, and improved efficiencies at its warehouses. That demonstrates Next’s ability to drive earnings growth through multiple levers, reducing its reliance on the UK consumer. While we’ll be keeping an eye on any further deterioration in trading conditions, we’re not overly concerned at the moment.
We’re pleased to see full-price sales continue their upward trajectory. Delivering what fashion-conscious consumers want at the right price point is exactly what’s helping to keep Next’s profitability at the top end of its peer group.
Although that’s not guaranteed to continue, the group’s sales are skewed towards middle-class and middle-aged consumers, and we expect this group to remain resilient even if inflation ramps up through the rest of the year. A store estate still has a role to play in serving those customers and supporting Next’s multi-channel offer, but growth from bricks-and-mortar is proving harder to come by.
Debt levels are comfortable, and Next generates plenty of surplus cash. That supports a prospective dividend yield of around 3% with potential for further payouts through share buybacks or special dividends. But as always, no shareholder returns are guaranteed.
We remain positive on Next’s long-term outlook. A strong management team, good execution and consistent delivery have helped investors place a higher value on the business. Despite this, we still see some modest upside on offer if overseas expansion continues at its current pace. However, competition is intense and rising macroeconomic uncertainty could get in the way.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means that human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Next’s management of ESG issues is strong.
The group’s ESG issues are overseen by the Board, but its overall reporting doesn't meet leading standards. ESG performance targets aren't factored into executive compensation, and it discloses weak environmental policies and whistleblower programs.
Next key facts
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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 LSEG. 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.