Shares in retail bellwether Next (NXT) topped the FTSE 100 leader board on Wednesday after the clothing and homeware purveyor increased full year profit guidance in a trading update pulled forward by a fortnight.

Sales during the last 11 weeks have been ‘materially ahead of our expectations’ said Next, whose shares were bid up 9.7% to £81.14 on yet another profit upgrade and the news it is restarting dividends.

UPGRADING GUIDANCE

Simon Wolfson-led Next has upgraded its central guidance for full year profit before tax by £30 million to £750 million, towards the top of its previous estimate range.

Full price sales in the 11 weeks to 17 July were up 18.6% on the comparable pre-pandemic period two years ago, breezing past the fashion retailer’s previous central guidance of 3% growth and reflecting strong online sales and ongoing recovery in brick and mortar sales since the reopening of non-essential retail in April.

KEY DRIVERS

Next attributed its unexpectedly strong second quarter sales to the release of pent-up demand for adult clothing and the onset of hot weather at the end of May and start of June, which drove consumers to splash out on summer clothes, having not bothered much during the pandemic’s various lockdowns.

The retailer pointed out that growth slowed ‘significantly’ once the balmy temperatures passed.

Next also profited from the fact consumers have saved up cash during lockdown and from the pandemic-induced staycation trend which has boosted UK domestic spending.

Feeling more optimistic about the outlook than it was three months ago, Next increased its full price sales growth guidance for the rest of the year from 3% to 6%, although management doesn’t expect sales to continue at these exceptionally strong levels.

A quality retail operator famed for its formidable cash generation, Next has decided to repay £29 million of business rates relief to the government. As a result of the pandemic, Next didn’t pay any dividends last year but it now believes it is appropriate to recommence dividend payments.

Next expects to generate surplus cash of £240 million which it will return to shareholders through special dividends, the first to be paid in September, before returning to ordinary dividends in the year to January 2023.

THE EXPERT’S VIEW

Russ Mould, investment director at AJ Bell, commented: ‘Hot weather during the May half-term encouraged people to go outside and enjoy leisure and retail pursuits. While Next says the latter part of June wasn’t as good for sales growth when the weather took a turn for the worse, that does resonate with ASOS also blaming less favourable weather for its own sales blip.

‘We’ve heard from many retailers in recent years how business is shifting online, and the high street or retail park stores are becoming a sideshow. Next is managing to keep its stores more relevant by using them for a combination of click and collect, customer services and as a showcase for products.

‘Next is giving customers a reason to keep visiting its stores and in doing so it has an opportunity to try and sell them more items. Once the summer period is over, one might expect Next to try and push more formalwear in anticipation of more people returning to the office to work, either on a full or part-time basis.’

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Issue Date: 21 Jul 2021