Next plc (NXT) Ordinary 10p Shares

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Next’s full-year sales rose 10.8% to £7.0bn. Within that, its UK Online and Retail channels grew by 10% and 2% respectively. Overseas sales grew at a much faster pace of 40% to £1.3bn.

Pre-tax profit rose by 14.5% to £1.16bn, helped by an uptick in margins.

Free cash flow rose by £0.1bn to £1.1bn. Net debt, including leases, was broadly flat at £1.7bn.

In the coming year, full-price sales are forecast to rise by 4.5%, and pre-tax profits are expected to grow by 4.5% to £1.21bn.

A final dividend of 181p per share was announced, taking the full year total up to 268p, up 15%. More than £0.5bn of cash was also returned to shareholders through share buybacks and special dividends.

The shares rose 6.4% in early trading.

Our view

Next delivered another strong set of results with full-year profits edging slightly past expectations. The outlook for the year ahead was also broadly positive, despite disruption from the conflict in the Middle East, which saw markets react positively on the day.

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.

For now, rising costs resulting from the Middle East conflict are being offset by cost savings elsewhere in the business. But if there’s a longer-term disruption, we could see price hikes which would likely weigh on demand. The picture remains uncertain, so we’ll be following developments closely.

While there are plenty of positives to take away from Next’s position in the industry, it’s important to remember that retail is a fickle sector. Styles can change quickly, meaning the group will always be chasing a moving target to deliver the right offering to customers. And any big missteps on this front will be costly.

The high street is also in decline, and Next isn’t immune. Despite an uptick in store sales last year, this segment’s 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 and the industry's sensitivity to inflationary pressures, 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.

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.

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