Next plc (NXT) Ordinary 10p Shares

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In the nine weeks to 28 December, Next’s full-price sales were up 5.7% on a comparable basis, ahead of the group’s 3.5% growth expectations. This was driven a strong uplift in its online channels which helped to offset a 2.1% decline in retail sales.

Due to the better-than-expected sales growth, full-year pre-tax profit guidance has been upgraded by £5mn to £1,010mn.

Full-year net debt, excluding lease liabilities, looks set to fall by around £75mn to £625mn. Share buybacks over the year are expected to total £326mn.

For the upcoming 2025/26 financial year, Next expects a 3.6% rise in pre-tax profits to £1,046mn, despite facing around £67mn of additional costs from wage inflation and National Insurance increases. Net debt is expected to fall by a further £75mn.

The shares rose 2.1% in early trading.

Our view

Next’s better-than-expected Christmas trading period gave investors plenty to be jolly about as the group issued its fourth profit upgrade in a little over five months.

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.

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, the big picture is that in-store 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.

Cash generation is healthy, allowing the group to trim down its net debt level while still having plenty left over to fund share buybacks. There’s also a respectable prospective 2.6% 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 expanding overseas isn’t easy, as many of its peers have found out the hard way, so ups and downs along the way can’t be ruled out.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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