Retail bellwether Next (NXT) rallied 9.2% to £57.46 on Wednesday after the clothing-to-homewares seller upgraded annual profit guidance and reported a second quarter sales fall that was far better than projections.

For the second quarter to 25 July, Next’s full price sales fell 28% compared to the same period of 2019. While that was a significant slump, it was less than half the decline of worst case scenario forecasts, which anticipated a 62% plunge.

Encouragingly, the latest figure also outstripped the 50% decline best case scenario given in April, issued at the height of the pandemic.

PLEASANT SURPRISE

‘Warehouse capacity has come back faster than we had planned, and store sales have been more robust than anticipated,’ explained Next. ‘As a result, our second quarter sales have been significantly ahead of our internal plan.’

Russ Mould, investment director at AJ Bell, remarked: ‘It’s a pleasant surprise to see Next beat its best expectations for trading and this is testament to its strong qualities as a business.

‘A cynic might suggest that it was too pessimistic in its scenario planning back in April, just like many other companies which have set the bar very low for their second quarter earnings period.’

Retail sales slumped 72% in the quarter with like-for-like sales in reopened stores down 32% since the reopening, while Next’s online sales grew 9% during the quarter.

LIKING LOWER RETURNS

Since the reopening, out-of-town retail park outlets have ‘significantly outperformed’ shopping centres and high street locations, said Next.

The retailer has also benefited from lower levels of returns. Previously it was common for someone to buy two sizes of an item and return the one that didn’t fit.

Now, customers are buying more items such as childrenswear and homeware that tend to have lower return rates, and less of the stuff they’d normally send back like dresses and formalwear.

Lockdown restrictions also deterred customers from taking items back to shops.

Based on the retailer’s new ‘central’ sales scenario, Next is guiding towards pre-tax profits of £195 million, still be materially below the £729 million generated in the year to January 2020.

Year-end net debt is likely to fall by around £460 million to £650 million thanks to asset sales, the suspension of dividends and share buybacks along with the cash Next anticipates generating from operations.

KNOWN UNKNOWNS

Next’s chief executive Simon Wolfson commented: ‘There is still much that remains uncertain and our central scenario cannot be accorded the same degree of confidence that our guidance would normally receive at this time of year. The duration of social distancing rules, post-lockdown consumer behaviour, earnings, unemployment, and, most importantly, whether there will be a second wave lockdown, all remain unknowable.’

Nevertheless, Wolfson added ‘we are now more optimistic for the full year than we were at the height of the pandemic.’

Following the update, Shore Capital commented: ‘Next remains a well-managed company with a history of strong financial and stock control with good cash generation. As we have suggested full year 2021 is a wipe-out year in terms of earnings and dividend. Next will be a retail survivor given its strong online presence and strength in its balance sheet given its historic cash generation.’

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Issue Date: 29 Jul 2020