Next's half-year sales rose 5.4% to £2.6bn, helped by rising wages and exceptionally warm weather in late May and June which significantly boosted sales of the Summer collection.
Pre-tax profit was up 4.8% to £419.8m, driven by top line growth and a 3.2% increase in own-brand full-price sales.
Free cash flow improved from £130.3m to £438.1m due to higher amounts of cash generated by the underlying business. Net debt, including lease liabilities, improved from £1.9bn to £1.7bn.
Full-year pre-tax profit guidance has been raised from £845m to £875m.
Next completed £167m worth of share buybacks in the first half, and expects to spend a further £52m in the second. An interim dividend of 66p per share has also been announced.
The shares rose 1.6% following the announcement.
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Our view
Next's half-year results continued the hot streak of beating market expectations on the upside.
Full-year pre-tax profit guidance got yet another upgrade, now expected £30m higher at £875m. An increase in full-price sales and a strong performance from the online division were key drivers, with online profit rising at double-digit rates. Successfully keeping full-priced sales front and centre to avoid discounts is one of the main reasons Next boasted some of the best margins in the sector.
The online division accounts for more than 50% of group sales, and we're pleased to see that increased warehouse space and operational tweaks are helping to iron out some of the problems of the past. There's still some work to be done to improve reliability and efficiencies further, but it was pleasing to see the proportion of items delivered late in June was down 45% year-on-year.
The online focus has helped Next grow its brand in overseas markets too. Sales abroad were up 18% in the first half, with net margin doubling to 14%. It's still a relatively small slice of the pie at the moment, but overseas markets offer huge growth potential and it's an exciting prospect if Next can execute well here. Although, nothing is guaranteed.
Next still has a strong high street presence too. Its shops typically have shorter, more favourable leases than peers, and are more focussed on out-of-town retail outlets that have fared better. That gives extra flexibility and should allow it to make the best of tougher conditions if they arrive.
But it's important not to get too carried away. Next expects high levels of inflation will continue to weigh heavy on consumers' wallets over the second half. And despite multiple guidance upgrades, full-year pre-tax profits are expected to be broadly flat year-on-year, highlighting just how tough the retail sector can be in times of economic uncertainty.
To cope with its own rising costs, Next has been on a big cost-saving programme. This isn't a long-term solution though, and likely isn't enough to fully offset rising input and staff costs this year. That means already struggling customers could end up footing the bill through higher prices at the tills. Just how much real incomes are squeezed in the coming months will be a key metric to watch.
The group plans to pay an interim dividend of 66p per share later this financial year, while also completing a further £52m of share buybacks. Analyst forecasts suggest these are currently covered by cashflows, but no shareholder returns are guaranteed.
Next's always been a top dog in the retail industry, but it's a tough sector to be in during times of economic uncertainty. It's weathering the storm admirably and looks well-placed to prosper when the outlook brightens. That's reflected in a valuation climbing back towards its long-term average but further up and downs could be in store along the way.
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