Next reported first-half sales growth of 8.0% and full-price sales growth of 4.4% (2.5% expected). Second-quarter full-price sales rose 3.2% (-0.3% expected) with online overseas performance the main driver of the beat, retail was down 4.7%.
Surplus stock was up 21% on last year, but down 5% on two years ago. Clearance rates are in line with internal forecasts.
Guidance for 2.5% growth in full-price sales over the second half remains in place. For the full year, total sales and full-price sales are expected to be £6.2bn (+6.0%) and £4.9bn (+3.4%) respectively. Profit before tax guidance has been raised from £960mn to £980mn.
The shares rose 7.9% following the announcement.
Our view
Next’s first-half results beat both revenue and profit expectations, leading to yet another profit upgrade.
Heading into the second quarter, Next’s biggest risk was that poor weather and a tough comparable period would put pressure on full-year guidance. But the group brushed off these concerns thanks to skyrocketing demand in its online channel. Delivering this level of growth in a deeply weather-impacted period means we’re encouraged about its prospects when headwinds ease.
Looking ahead, we continue to see the online channel as the main growth driver. It already accounts for more than half of group sales, and expansion overseas is still in its early stages. The group’s gaining traction in new markets, and we see a lot of room left to run if Next can execute its delivery well.
We’re pleased to see full-price sales continue their upward trajectory. Impressively, Next is achieving this whilst reducing the number of items ending on the sales rack. 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. Retail sales are 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 as they arrive.
The balance sheet looks in good shape, with debt levels trending in the right direction. There’s also a respectable 2.4% dividend yield on offer, but as always, no shareholder returns are guaranteed.
Next remains one of our favoured companies in the retail industry. We’re impressed by performance and don’t think the current valuation fully reflects its growth opportunities. But expanding overseas isn’t easy, as many of its peers have found out the hard way. That means further ups and downs could be in store along the way.
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 average.
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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A director of Hargreaves Lansdown plc is a Non-Executive Director of Next plc.
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