Next's full-year sales rose 8.2% to £6.3bn. Within that, UK online sales grew by 5%, more than offsetting a small decline in retail stores. Overseas sales grew at a much faster pace of 27% to £0.9bn.
Underlying pre-tax profit rose 10.1% to £1.01bn, helped by an uplift in full-price sales.
Free cash flow was broadly flat at £1.0bn. Net debt, including lease liabilities, rose 3.8% to £1.7bn.
Trading over the first eight weeks of the year was ahead of group expectations, and the group’s now expecting full-year sales growth of 5.0%. Full-year pre-tax profit guidance has been upgraded by £20mn to £1.07bn
A final dividend of 158p per share has been announced, bringing the year's total to 233p, up 12.1%. Share buybacks for the year totalled £360mn.
The shares were up 6.8% in early trading.
Our view
Next delivered a strong set of full-year results, with pre-tax profits rising through the £1.0bn milestone for the first time. Despite some caution around the outlook for the UK, trading in the new year has been ahead of expectations, leading to yet another upgrade to profit guidance.
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 more than half of group sales, and expansion overseas is still in its early stages.
Around 90% of its overseas business comes from Europe and the Middle East, both of which can be serviced quickly and cheaply from the UK. Given the untapped size of these markets, and increased traction in new markets, there’s a big opportunity if Next can execute its expansion plans well, but overseas expansion carries a high level of execution risk.
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.
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, with in-store sales moving in the wrong direction. The group has some insulation in the fact that 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. No bad thing given the challenging outlook for the UK economy.
Cash generation is healthy, allowing the group to trim down its debt level while still having plenty left over to fund share buybacks. There’s also a respectable prospective 2.5% dividend yield on offer, but as always, no shareholder returns are guaranteed.
Next remains one of our favourite companies in the retail industry, and we see the potential for more success if overseas growth continues. The valuation’s broadly in line with its long-run average, which looks undemanding given its strong market position and growth opportunities. But given the cyclicality in the industry investors still need to prepare for ups and downs. .
A director of Hargreaves Lansdown plc is a Non-Executive Director of Next plc.
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.
Next key facts
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