Next's full price sales, including finance interest income, were down 0.7% in the first quarter, as lower online and retail sales more than offset higher interest income. This was better than the expectation of a 2% drop.
Total trading sales, including markdown and clearance sales, were up 1.2%. This reflects an easy comparative period due to stock shortages in the run up to Christmas 2021. Clearance stock levels returned to normal this year, in line with pre-pandemic levels.
The group expects to generate £220m of surplus cash this year. It also completed £55m worth of buybacks in the first quarter, and spent £8.5m acquiring the intellectual property of Cath Kidston.
Full-year sales and profit before tax guidance has been maintained, with both expected to decline by 1.5% and 8.7% respectively.
The shares rose 2.6% following the announcement.
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Our view
Despite declining, Next's full-price sales came in better than expected over the first quarter. But that hasn't really moved the dial. Full-year pre-tax profit is still predicted to tumble 8.7% to £795m.
That's why it's important to not lose sight of the very real challenges ahead. Soaring inflation means the cost-of-living crisis looms heavy over the group's customer base and regardless of management's best efforts, it's likely to squeeze margins.
To cope with its own rising costs, Next is raising prices. With selling prices expected to be hiked by 7% in the first half of this year, we're cautious as to whether sales will remain robust. The group's position as a middle-of-the-road retailer means its customers could slide down the value chain rather than fork over a little more.
Online sales have started to retreat after a period of exceptional pandemic-fuelled growth. While the group's said the customers it picked up during the pandemic have been sticky, online sales are likely to keep ticking lower in the short term.
The rapid growth in online and distribution services mean operations aren't as efficient as we'd like. This does open the door for improvement though, and it's something Next's management has called out as an area of opportunity.
Add to that the ongoing structural decline of bricks-and-mortar shopping, and you have a very challenging environment. However, the silver lining here is that 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.
Growth in its third-party LABEL operations, which charge a commission for sales through the Next platform, is another bright light. With big names like Reiss and Gap now participating in the programme, opportunity lies ahead. These sales are lower margin, but they also come with very little risk.
A higher corporate tax rate came into play in April and adds to the group's list of challenges. Net debt is expected to rise further as the group plans to maintain its dividend flat at 206p per share, while still completing £220m of share buybacks. But given the rising risks within the sector, remember that shareholder returns aren't guaranteed.
Next's always been a top dog in the retail industry, but it's a tough sector to be in during an economic downturn. It's price-point brings some uncertainty around the robustness of its sales. But this concern's already priced into the group's valuation, which is towards the lower end compared to peers on a price/earnings basis.
Next key facts
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