Next’s full-price sales rose 6.2% in the first quarter, ahead of group guidance for 4.0% growth. In the UK, double-digit online growth more than offset a 3.4% decline in its retail stores. International sales rose 12.8% over the period.
The Middle East conflict is now expected to bring £47mn of additional costs this year (previously £15mn). Next currently expects to fully offset this impact through price increases and cost savings.
Full-year guidance has been upgraded, with full-price sales now expected to grow by 5.0% to £5.9bn. Pre-tax profit growth guidance has also been raised from 4.5% to 5.2%.
£196mn of the ongoing £510mn share buyback programme was completed.
The shares were broadly flat in early trading.
Our view
Next had a better-than-expected start to the year, giving the group confidence to raise its full-year guidance. While the conflict in the Middle East weighed heavily on performance in the middle of the quarter, the region has seen a significant recovery in recent weeks, and the broader sales outlook remains positive.
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 continue to grow quickly but still represent only a small slice of the pie, at around 6% of the group’s total. Given the untapped size of these markets, there’s a big opportunity if Next can execute its expansion plans well.
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.
The long-term CEO, Lord Simon Wolfson, has shown an ability to move with the times, helping the group deliver strong returns over the long run. While 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.
The Middle East conflict is stretching on longer than Next had previously anticipated, and it's now expected to bring £47mn of additional costs this year. The plan is to offset the impact through price increases in the region and cost savings throughout the business. But the picture remains uncertain, so we’ll be following developments closely.
The high street is also in decline, and Next isn’t immune. Sales in its retail stores have started the year in negative territory, and profitability is under pressure from wage inflation and rising employer taxes.
Despite the challenges, debt levels are comfortable, and there’s plenty of surplus cash on hand. That means that on top of ordinary dividends, shareholders could receive an additional £0.5bn of cash through share buybacks or special dividends this year. But as always, no shareholder returns are guaranteed.
Next remains one of our favourite companies in the retail industry. The valuation’s come down a touch in recent months, and we think the long-term investment case looks favourable. But given the intense competition in the industry and rising macroeconomic challenges, investors still need to prepare for ups and downs.
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 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.
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