Total first half sales were up 14.9% to £2.5bn compared to last year. This reflected strong growth in in-store sales somewhat offset by a decline in Online. Pre-tax profits were up 15.5%, reaching £401m.
After double-digit full price sales growth in the first quarter, this subdued in the second quarter to 5%, but this still exceeded management expectations. Full price sales in the current period have disappointed, causing management to lower growth expectations to 4.8%, down 1.5%. The group's also downgraded its full year pre-tax profit guidance to £840m from £860m. This is the second time this year they've issued a profit warning.
The board announced an interim dividend of 66p per share.
The shares fell 9% following the announcement.
View the latest Next share price and how to deal
Our view
Next's profit warning should come as no surprise given the wider uncertainty for consumers. 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.
Add to that the ongoing structural decline of bricks-and-mortar shopping, and you have a very challenging environment. 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.
But it'll take more than sweetened lease terms to deal with the macroeconomic backdrop. To cope with its own rising costs, Next raised prices. But the group's position as a middle-of-the-road retailer means its customers would rather slide down the value chain than fork over a little more. The result is a slowdown in full-price sales that looks unlikely to let up until consumer confidence starts to return.
Online sales growth is also starting to normalise after exceptional pandemic-fuelled growth. While the group's said the customers it picked up during the pandemic have been sticky, this was a dim silver lining in an otherwise gloomy story. 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.
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. And it's something the group plans to improve moving forward through closer monitoring.
We were disappointed to see growth continued to decline Overseas, an area of opportunity for Next. What's more, margins in this part of the business have fallen almost 10 percentage points over the past three years due to rising duty charges and delivery cost inflation. Some of that's to be expected when breaking into new markets, but the group's 7.4% margins are well below its 10% target. The crumbling pound will make it easier for the group to recoup rising costs without the need for price hikes and the group's also planning to improve the mix of products sold abroad to improve profitability.
A hugely reduced debt pile allows some breathing room to navigate these challenges. It also feeds into the group's ability to pay dividends - the group's returned to its normal dividend policy this year. However, particularly given the rising risks within the sector, no dividend is ever guaranteed.
Next's always been a top dog in the retail industry. But the rapidly deteriorating landscape has set the group off balance. The group could be in for a tough few years if its growth plans are derailed by challenges in the industry. This concern has been reflected in the group's valuation, with shares changing hands well below the long-term average.
Next key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results
Online full price sales fell 6% to £1.3bn as Total UK and Overseas sales dropped 3% and 13% respectively. The fall in UK sales was driven by a 15% fall in NEXT brand, partially offset by a 20% rise in the third-party LABEL business. Compared to pre-pandemic, total Online full price sales rose 46%. Net margin fell from 21.6% to 15.5% due to higher logistical and freight costs and sales on lower margin LABEL products. Total Platform, which allows other brands to use Next's technology and infrastructure, added both Reiss and Gap but saw profits decline. The exceptional online sales growth seen over the past few years has started to taper and management's now expecting growth to revert back to its pre-pandemic trajectory.
Retail sales were up 63% to £880m with full price sales better than expected. This reflected a return to in-person shopping. Compared to pre-pandemic, sales were up 1%. Operating profit (including lease interest) was £82m, up from a loss of £39m last year. The average lease length on stores was 4.8 years, down from 5 years last year. Half of store leases (by value) will expire or break within 3.9 years. Despite stock levels growing faster than retail sales resulting in more markdowns, retail margins rose, mostly driven by lower rental costs from renewed leases.
Interest income in the Finance business rose 12% to £134m as more customers built up their balances once the pandemic was over. This helped net profit rise 23% to £81m as total costs remained flat.
Warehouse capex, at £125m, is broadly in line with last year. The group plans to deliver Elmsall 3 automation in phases throughout the course of next year. This warehouse should increase box capacity by 50% and lower per-unit labour costs by around 40%.
Net debt including leases was £1.9bn, up from £1.5bn last year. Free cash flow was £130.3m, down from £427.1 in July due to lower profits.
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