Clothing and homewares retailer Next (NXT) has coped surprisingly well with the challenging consumer backdrop and downpours in July to deliver a second unexpected profit upgrade within two months.

This follows solid trading in the second quarter to 29 July, with full price sales up 6.9% year-on-year thanks to better-than-expected clearance rates in the FTSE 100 retailer’s end-of-season sale.

However, sales growth did slow significantly in the last six weeks of the quarter compared with the previous seven weeks and Next’s management remains cautious, no doubt mindful of rising interest rates weighing on consumer confidence.

This kept a lid on gains on Thursday, with Next shares nudging up just 0.3% to £68.72 after a positive year-to-date run.

£10 MILLION UPGRADE

One of the country’s leading fashion retailers, Next upgraded its year-to-January 2024 pre-tax profit guidance by £10 million to £845 million.

The new forecast still implies a year-on-year profit decline of 2.9%, though Next’s CEO Simon Wolfson is renowned for damping down expectations, preferring to under-promise and over-deliver.

Next had previously issued a surprise update on 19 June in which it upgraded profit guidance on the back of better-than-expected sales boosted by exceptionally warm weather.

Since then, full-price sales have been up 3.7% year-on-year, ahead of Next’s guidance of growth of 0.5%.

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Bricks and mortar retail full-price sales were up 2.2% in the quarter, while the online division demonstrated strong growth, outperforming the UK online clothing market with full-price sales increasing by 10%.

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Laith Khalaf, head of investment analysis at AJ Bell, commented: ‘A washout July could have been catastrophic for retailers and so there was a sense of nervousness ahead of Next’s summer trading update.

‘While the rate of its sales growth slowed dramatically in the six weeks to 29 July versus the previous seven weeks, Next seems to have avoided a downpour and still managed to shift quite a bit of stock in the period.’

Khalaf added: ‘Fundamentally Next seems to be keeping its head above water in a difficult environment, but the outlook for its earnings is less attractive.

‘The consensus forecast is for profits to decline in the current financial year and then only show modest improvement over the next two years. This raises fears that Next has a long-term growth challenge, which might explain why it has been trying so hard to in recent years to sell third party products through its website.’

Shore Capital said Next’s ‘impressive’ performance, especially in the online channel, could ‘potentially have a positive read-across on other online pure players. A case in point is German online peer Zalando (ZAL:ETR), which has also narrowed its profit guidance to the upper end of its previously communicated range. While Next’s upgrade may be considered modest, it is encouraging and highlights the fact that consumer demand remains robust.’

Liberum Capital views Next as a ‘clear winner’ amid the shifting structural dynamics in fashion and home retail. ‘Store-based competitors continue to vanish from the high street and online pure plays like Boohoo (BOO:AIM) and ASOS (ASC) are fixing their houses and focusing on cash and profits instead of growth,’ remarked the broker.

‘Even within online, platforms like Next and Zalando are taking share from branded and wholesale models.’

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 (Ian Conway) own shares in AJ Bell.

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