Shares in clothing and homewares colossus Next (NXT) nudged up 0.43% to £61.16 on Wednesday as the fashion retailer once again upgraded annual profit guidance.
The latest upwards earnings revision followed a better-than-expected third quarter sales performance from the retail bellwether, which continues to bounce back from the first Covid-19 lockdown and the temporary closure of its online business back in March.
Based on management’s new central sales scenario, full-year pre-tax profit is now expected to come in at £365 million. That’s up from the £300 million guidance given as recently as last month, though down on the £729 million generated in the far less turbulent year to January 2020.
Furthermore, the cash-generative retailer’s year-end net debt is now seen reducing by £487 million to a more than manageable £625 million.
THIRD QUARTER SURPRISE
Full-price sales for the third quarter to 24 October rose by a better than anticipated 2.8%, while total sales including markdowns edged up by 1.4%.
Generating more than half of its sales digitally, Next’s online sales grew by a healthy 23.1%, reflecting strong sales at home and overseas, offsetting a 17.9% drop in physical retail stores.
‘The sales performance by product category remains very similar to the second quarter, with home and childrenswear over-performing while demand for men’s and women’s formal and occasion clothing remains weak,’ explained Simon Wolfson-led Next, adding that ‘out of town retail parks continue to perform better than high streets and shopping centres.’
Finance interest income dropped by 13% in the quarter, driven by lower customer balances, which were down 16% year-on-year. These lower balances were as a result of much lower credit sales during lockdown in March, April and May, but encouragingly, Next saw ‘a significant recovery in credit sales’ in the third quarter.
STRIKING A CAUTIOUS TONE
Although the latest upgrade is positive for Next, there is a very high degree of uncertainty in its estimates - the upside annual pre-tax profit forecast is £400 million, downside forecast is £290 million - which depend on the progress of the pandemic, as well as government and consumer reactions, in the run up to Christmas.
In the outlook statement, Next said the biggest risk to sales and earnings is whether England, Scotland and Northern Ireland follow Wales’ decision to temporarily shut down non-essential retail shops.
‘We have found no evidence of the virus being transmitted in our stores; nor are we aware of any studies that suggest clothing and homeware retail presents a significant risk of infection,’ stressed Next.
Reiterating its ‘hold’ rating, Shore Capital sees Next as a retail sector survivor, albeit one that may have too many stores in the new world.
Next remains ‘a well-managed company with tight cost control, good stock management and good cash generation’, said the broker.
‘Yet again, the company has surprised on the upside and we have now had two upgrades in recent months. We provisionally upgrade our forecast to £400 million for full year 2021, at the top end of Next’s own expectations highlighting it has enough stock for Q4 and that UK consumers with more disposable income continue to spend.’
