- First quarter sales moderately better than feared
- Full year guidance reiterated
- But management is cautious over second quarter sales
Shares in Simon Wolfson-steered retailer Next (NXT) improved 2.7% to £66.88 after the clothing and homewares giant reported better than expected first quarter trading and reiterated full year earnings guidance.
This came as a relief to investors given the tough retail environment that is sorting the wheat from the chaff.
However, the high street bellwether remains cautious about second quarter sales, which are expected to be down 5% on the comparable prior year period which benefited from warm weather and pent-up demand for events.
Q1 SALES PROVE BETTER THAN FEARED
For the 13 weeks to 29 April 2023, Next’s full price sales were down 0.7% year-on-year, slightly better than the company’s previous guidance for a 2% decline, despite cold weather, a washout March and the cost-of-living crisis facing consumers.
Next’s retail sales outperformed the online channel, with revenues from physical stores down 0.6% during the quarter compared with a 1.6% drop in digital sales.
BUT NEXT REMAINS CAUTIOUS OVER Q2
With a well-earned reputation for prudence and managing investor expectations, Next is sticking with its sales and profit guidance for the year to January 2024 despite the moderately better than feared first quarter showing.
Management, led by well-regarded CEO Wolfson, expects to deliver a profit before tax of £795 million, down 8.7% on last year, for a 12.5% drop in earnings per share (EPS) to 501.9p.
The FTSE 100 retailer also downgraded its sales forecast for the second quarter from a 4% fall to a 5% decline on the grounds that ‘some of the first quarter’s success, particularly in holiday clothing sales leading up to Easter, might have been pulled forward from the second quarter’.
Furthermore, last year’s second quarter benefited from ‘unusually warm weather and pent-up demand for events such as weddings, proms etc’, explained Next, which has been gobbling up distressed brands including Made.com, Joules and Cath Kidston.
The retailer is projecting to generate £220 million of surplus cash, which will be returned to shareholders through share buybacks or invested in equity stakes in potential Total Platform clients.
EXPERT VIEWS
Begbies Traynor’s (BEG:AIM) Julie Palmer pointed out that with inflation still running at over 10%, Next’s first quarter performance shows ‘just how resilient this bastion of our high street is. The decline in total full price sales is more modest than first forecast and while sales for the first half are now expected to decline by nearly 5%, total sales are still up year on year as the retailer benefitted from higher clearance sales as stock levels returned to pre-pandemic levels over Christmas.’
Palmer also pointed out that elsewhere, ‘retailers up and down the country are coping with a cost of living crisis that’s seeing consumers tighten their purse strings, but Next has maintained guidance which is a very credible performance given the current environment.’
Russ Mould, investment director at AJ Bell, noted that while Next’s sales update was moderately ahead of its prior expectations, it is ‘nothing to get excited about. Sales growth has stalled and the only area where it is making decent gains is from the income attached to customer credit accounts.’
Mould continued: ‘Next has a serious growth problem and while it may remain a profitable business, a company of its calibre is expected to show financial progression year after year.
‘Repeated guidance for an 8.7% decline in full-year pre-tax profit suggests the business needs to pull a rabbit out of the hat to regain its mojo.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Steven Frazer) own shares in AJ Bell.
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