Shares in fashion retailer Next (NXT) shrugged off the new UK lockdown restrictions to rise 8% to £74.62 on the delivery of much better than expected sales during a Covid-impacted Christmas.
Full price brand sales were down 1.1% year-on-year over the nine weeks to 26 December, comfortably ahead of Next’s previous central guidance for an 8% decline, though an additional property provision meant the retailer nudged down its year-to-January 2021 pre-tax profit forecast.
ONLINE CONTINUES TO SHINE
During the fourth quarter to Boxing Day, the best-in-class digital retailer’s online sales grew 38% year-on-year as retail sales slumped 43% during a period of store closure disruption.
Strong online sales of everything from home products, childrenswear, loungewear and sportswear almost compensated for the lost brick and mortar sales caused by Covid restrictions, while returns rates continued to be much lower than last year.
Boosted by better sales in November and December and factoring in losses from store closures in January, Next’s pre-tax profit forecast for the year to January 2021 is £370 million.
This marked a fourth upgrade in five months, but two exceptional items, most notably an additional property provision of £40 million, mean the total full year profit forecast is actually £342 million.
This is below the £365 million midpoint of the £290 million to £400 guidance range given in October, before the English lockdown in November.
Besides shop closures, the Simon Wolfson-steered clothing-to-homewares colossus also warned the pandemic has ‘adversely affected the flow of container traffic from the Far East. At present many of our deliveries are running two to three weeks late and we expect this level of disruption to continue into the new year.’
SURPRISINGLY UPBEAT OUTLOOK
Investors also welcomed a rather upbeat central guidance for the year ending January 2022, in which the resilient retailer assumes its retail stores will remain closed during February and March.
Under this scenario, Next expects a pre-tax profit rebound to £670 million, based on full price sales being flat against two years ago (2019/20).
In the pre-pandemic year to January 2020, Next delivered pre-tax profit of £729 million, so the central guidance of £670 million implies it will return to making some 90% of that year’s profits.
THE SHORE CAPITAL VIEW
Shore Capital says Next’s trading statement ‘sets the tone for the retailers this January. Whilst retail stores are closed, the online segments continue to trade strongly. Next is a retail survivor and has net debt under control and plenty of liquidity headroom.
‘Whilst the retail estate remains closed under lockdown 3.0 restrictions, it is skewed towards retail parks (60% of retail sales are derived from retail parks), which have fared better than high streets and shopping centres, which have both struggled with footfall during 2020.’
The broker cautioned that the risk ‘could be on the downside with the first quarter of full year 2022 seeing closed retail stores with the further restrictions emanating from lockdown 3.0. That said, Next is one of the best managed retail companies we follow and will navigate its way through the continued fog, evidenced by its confident outlook, despite the new lockdown restrictions across the UK.’
Russ Mould, AJ Bell Investment Director, said shareholders will also be pleased to see Next reaffirm its forecast for debt reduction, which ‘may give Next scope for strategic moves to capitalise upon the weakness of others and enhance its competitive position. The company has already agreed to take a controlling stake in Victoria’s Secret’s UK business, and it is thought to be running the rule over certain assets from Sir Philip Green’s fallen Arcadia group, notably Topshop and Topman.
‘The company’s financial strength will also raise hopes for a return to the dividend list, following the scrapping of fiscal 2020’s final and fiscal 2021’s interim payments.’
