Next’s full-price sales grew 7.6% in the third quarter, ahead of its own 5.0% guidance. The better-than-expected performance was driven by the early arrival of colder weather, compared to an unusually warm September and early October last year.
In the UK, full-price Online sales rose 7.9% and Retail returned to growth, up 2.9%. Overseas Online sales grew at a much faster pace of 20.4% in the period.
The improved performance has seen Next upgrade its fourth-quarter full-price sales guidance from 2.5% to 3.5%. As a result, full-year pre-tax profit guidance was also upgraded by £10mn to £1,005mn.
The shares rose 1.5% in early trading.
Our view
Another strong quarter for Next sees the group fashion its third profit upgrade in as many months. Favourable weather conditions have been thanked for driving consumers to update their winter wardrobe in the period, and in turn, delivering better-than-expected full-price sales.
Skyrocketing 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.
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.
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. Despite a small bounce in the third quarter, Retail sales have been moving in the wrong direction this year. 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 was in good shape last we heard, with net debt remaining at a comfortable level. 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, and we see the potential for more success if overseas growth continues. But its impressive performance in recent years hasn’t gone unnoticed by the market, and the valuation’s sitting above its long-run average. That increases the pressure to deliver growth, and as many of its peers have found out the hard way, expanding overseas isn’t easy.
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 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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