Following profit warnings (4 May 2022) from Boohoo (BOO:AIM) and Joules (JOUL:AIM), retail bellwether Next (NXT) has supplied some much-needed relief for the retail sector with a solid first quarter trading update.
Despite the uncertain outlook for the consumer due to inflation and the cost of living crisis, the clothing and homewares retailer also reiterated full year sales and profit guidance, sending the shares up 1.2% to £61.60.
SOLID FIRST QUARTER
For the 13 weeks to 30 April 2022, Next’s full price sales rose 21.3% year-on-year while retail sales growth was 285%, with this exceptionally strong increase reflecting the lifting of lockdown restrictions with shops shuttered for the bulk of last year’s comparative quarter.
As expected, online sales were down 11% year-on-year as store sales recovered and took share from the digital channel, though Simon Wolfson-led Next was at pains to point out that its online sales were up 47% versus the pre-pandemic 2019/2020 financial year.
GUIDANCE REITERATED
Reassuringly, given the inflationary cost pressures facing the business and its customers, the FTSE 100 high street fashion chain reiterated its guidance for the year to January 2023.
This points to full price sales growth of 5% and pre-tax profits of £850 million, which would be up 3.3% on last year.
Since posting annual results in March, cash-generative Next said it has bought back £107.5 million worth of its own shares and spent £20 million acquiring minority stakes in a number of businesses, with ‘the lion’s share’ of this investment being in baby goods retailer JoJo Maman BeBe.
THE EXPERTS’ TAKE
Russell Pointon, director of consumer at Edison, commented: ‘With recent warnings on the outlook from other consumer-facing companies, Next looks well placed to navigate the current economic backdrop of inflation and price rises.’
Labelling Next a ‘consistent double-digit returner’, Liberum Capital highlighted that the retailer’s ‘successful transition to online, built meticulously over a number of years, has delivered circa 50% sales growth in last two years’.
The broker thinks Next’s 5% sales growth guidance for 2023 appears ‘conservative as footfall returns to stores and online platform continues to expand, supported by increased ranges, a 15% planned increase in online marketing spend, and co-funded marketing with brands.
‘Cost inflation should be manageable with planned price increases, although we do expect a 100 basis point margin decline in full year 2023 to account for the lag between freight and wage inflation and price increases.’
Shore Capital said: ‘Next remains a well-managed company with an experienced management team and tight stock and cost control. We continue to highlight that one of the favourable characteristics of the Next investment case remains the cash generation, which is reflected in the ongoing share buyback programme, which enhances earnings per share.’
However Russ Mould, investment director at AJ Bell, warned of tough times ahead for the likes of Next: ‘Once the latest energy bills hit the doormat, households are going to have a shock when they try and work out how much money is left after paying for food, drink, utilities, council tax and other monthly outgoings. There remains a big risk that non-essential retailers will be left out in the cold because households’ money no longer goes as far.
‘Unless you need smart clothes for a job interview or need to replenish socks and underwear, there is a strong argument to make existing threads last longer when money is tight. Next may have one of the best management teams in the retail sector, but there is only so much they can do in the current situation.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Tom Sieber) own shares in AJ Bell.
