Second-quarter full-price sales rose 9.2%, compared to guidance of 4.0%. Performance was driven by strength in International online sales, which increased 36.9%, with UK online sales up 5%. This more than offset a small decline in Retail Stores.
Next has upgraded full-year guidance, with full-price sales now expected to grow by 6.3% to £6.0bn, and pre-tax profit to rise 7.3% to £1.2bn.
The shares rose 7.1% in early trading.
Our view
Next’s positive trading momentum has continued into the second quarter, helped by hotter-than-expected weather. An upgrade is an upgrade, but this one looks on the modest side, and the positive market reaction suggests that investors agree with our view that there’s scope for this year to turn out a little better still.
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, with a pullback in demand following the outbreak of the current conflict proving to be short-lived. But the region still represents 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.
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 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 retailers. Consistent delivery has helped investors place a higher value on the business, and recent resilience has more than reversed the valuation pressure seen earlier this year. At these levels, we think that the shares look fairly valued. Further upside will likely need faster earnings growth, which Next is capable of delivering, though intense competition and 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.