High street retail bellwether Next (NXT) once again delivered a better-than-expected trading update for the third quarter to 30 October as it reported full price sales up 14% in the past five weeks. This beat the 10% forecast given with September’s first half results yet investors proved hard to please.
Shares in the clothing-to-homewares retailer lost nearly 3% to £80.80 as it maintained rather than raised full year profit guidance amid caution over rising staff and supply chain costs.
Investors have become used to Next upping guidance when it updates on trading, having done so four time this year, according to one market expert.
ONLINE SHINES
The £10 billion-plus company said third quarter full price sales rose 17% versus 2019 equivalent figures, a better pre-pandemic comparison. Online sales surged 40%, although sales growth has moderated in the last five weeks as the effect of pent-up demand begins to even out.
Next is therefore sticking with its profit guidance of £800 million for the year to January 2022, implying impressive 6.9% growth versus the pre-pandemic 2019/2020 financial year, though management remains cautious owning to slowing demand and supply chain disruption.
The need for further digital marketing spend and the increased use of inbound air freight and other online distribution costs is also set to constrain profits.
The FTSE 100 retailer doesn’t expect sales to continue at the level seen in Q3 during the seasonally-important fourth quarter, with the effects of pent-up demand ‘likely to continue to diminish’.
Next conceded stock availability remains a challenge, ‘with delays in our international supply chain being compounded by labour shortages in the UK transport and warehousing networks’, and also warned that inflation may weigh on consumers’ demand for ‘more discretionary purchases’.
THE EXPERTS’ VIEW
AJ Bell investment director Russ Mould said there are ‘plenty of reasons’ to justify Next’s cautious tone.
‘Family finances are coming under pressure from the higher cost of living and expectations of a near-term rise in UK interest rates could put a further squeeze on anyone with variable-rate borrowings.
‘Supply chain issues are still a key risk with regards to stock availability. Its shops are looking well stocked but there remains the risk that Next doesn’t have everyone’s desired clothing size.’
Mould continued: ‘The extra profit it has made in the past five weeks, beyond that originally forecast, will be gobbled up by costs related to marketing and transportation, hence why it isn’t raising full year profit guidance after a bumper third quarter.’
Reflecting on this year’s strong share price performance, Shore Capital’s Eleonora Dani said Next ‘deserves to trade on a premium to the general retail sector given the cash generation in the business. Next remains a well-managed company with tight cost and stock control, a clear well-executed strategy and an experienced management team.’
