Shares in Next (NXT) softened 3.1% to £61.88 after the clothing and homewares retailer downgraded its year to January 2023 sales growth guidance from 7% to 5% and its pre-tax profit guidance by £10 million to £850 million to reflect the closure of its Ukrainian and Russian businesses and slowing growth in other overseas territories.
The retail bellwether’s lowered guidance overshadowed robust results for the year to January 2022 as well as an improved outlook for Next’s UK physical shop sales.
Nevertheless, it seems inevitable the months ahead will be more challenging for UK consumers amid intensifying inflation and soaring household bills.
RACKING UP RECORD SALES
Group revenues grew 11.5% on a two-year basis to a record £4.86 billion, north of the £4.79 billion called for by the analyst consensus estimate, thanks to continued strong online sales and a better than expected performance from Next’s brick and mortar outlets once stores reopened in April 2021.
With consumers splashing the cash saved during the various lockdowns, Next’s pre-tax profits rose 10% to £823 million, ahead of the £819 million consensus of analysts’ estimates.
Looking ahead, CEO Simon Wolfson (pictured below) explained: ‘It is difficult to draw too many conclusions from sales this year in January, February and March, because our stores were shut for the entire period last year.
‘So far this year, UK sales are ahead of where we expected them to be, mainly driven by better than anticipated sales in our retail stores. We are also seeing a very sharp reversal of lockdown fashion trends, with a return to more formal dressing and notable reduction in spending on home and very casual clothing.’
Next also reported year-end net debt of £600 million, down 46% versus pre-pandemic 2019/20. During the pandemic in 2020/21, the FTSE 100 retailer paused dividends to help secure its finances.
However, in the year to January 2022 the retailer paid two special dividends and will return to its pre-pandemic ordinary dividend cycle in the year ahead.
THE EXPERTS’ VIEW
Shore Capital commented: ‘While we think that the company deserves to trade on a premium to the general retail sector given the cash generation in the business, we are conscious of the historical negative correlation Next shares have exhibited with inflation.
‘Looking ahead, we are also mindful of the tougher comps the company will start to face post Q1. The first quarter should be a strong one given that last year stores were closed in the UK and Easter falls in mid-April; however, it will be interesting to see how the business will trade after that.’
Russ Mould, investment director at AJ Bell, said: ‘For a company that has a habit of under-promising and over-delivering, the market has shown disappointment at Next’s downgraded sales guidance for its current financial year.
‘The key point of disappointment is reduced sales guidance for overseas territories, which is not simply the result of closing its Ukraine and Russian website operations. However, it has lifted guidance for likely sales from UK shops, which is a pleasant surprise given the direction of travel for UK retail - namely so much more business is going online.’
Mould continued: ‘Recent sales trends have seen consumers smarten up their appearance perhaps as more people are called back to work in the office. This dynamic could play out for a bit longer as this is arguably non-discretionary spend.
‘But as we move towards summer, there is a high chance that consumers will be looking for ways to reduce their non-essential spending and so buying outfits for holidays and parties might become less frequent.
‘Next is a leader in the retail space and you can be sure that whatever it is doing, others will follow. It remains one step ahead of the game.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares. The author (James Crux) and editor (Daniel Coatsworth) own shares in AJ Bell.
