- Clothing colossus delivers better than expected sales
- Upgrades profit guidance
- Warns impact of inflation ‘likely to worsen’
Shares in Next (NXT) nudged 2.3% higher to £69 after the clothing and homewares retailer defied the sector-wide doom and gloom to delivered news of better than expected second quarter sales and a full year profit guidance upgrade.
Besides resilience in the online channel, Next’s recent strength in brick and mortar sales continued in the second quarter to July 2022 amid strength in formalwear and warmer weather.
Yet as the cost of living continues to bite, the retailer issued a cautious central prediction of a 1% second half sales increase.
Next doesn’t foresee its stronger than expected recent sales performance continuing into the second half due to the absence of a similar warm weather windfall and with the impact of inflation on consumer spending ‘likely to worsen’.
GUIDANCE UPGRADE
Full price sales rose 5% year-on-year in the second quarter, £50 million ahead of Next’s earlier guidance, which the retailer believes was driven by unusually warm and dry weather in June and July as well as a ‘marked return to formal dressing’ driven by pent up demand for social events such as weddings.
Given a tough UK clothing market, Next also suspects the improvement in the fortunes of its physical stores is, to some extent, down to the number of competing stores that have closed in the last three years.
This strong quarterly showing gave Next the confidence to nudge up profit guidance for the year to January 2023 by £10 million to £860 million, implying robust 4.5% growth versus last year, with better full price sales more than offsetting the extra cost of recent disappointing surplus stock clearance rates.
LOCKDOWN TRENDS REVERSE
‘Sales in the first half of the year have been dominated by a sharp reversal of last year’s lockdown trends,’ explained the best-in-class retailer.
‘Sales in retail stores recovered, while online growth appears to have reverted back to its longer term trajectory. Many product trends have also returned to pre-pandemic norms. Lockdown winners such as home and sportswear retreated, while formalwear returned to favour. As anticipated, online returns rates and surplus stock also reverted to pre-lockdown levels.’
EXPERT VIEWS
Charlie Huggins, head of equities at Wealth Club, commented: ‘Next isn’t immune to the cocktail of headwinds facing UK retailers, but it tends to be better at managing them than most. These results are no exception.’
Yet Huggins warned that ‘if the consumer catches a cold, Next will feel it. But it’s unlikely investors will lose their shirt, given the resilience of its business model. Meanwhile, the long-term growth prospects for the business are looking better than they have done for quite some time.’
AJ Bell investment director Russ Mould explained Next has benefited from market share gains as competitors like Topshop and Debenhams have disappeared from the high street.
‘It seems the hot weather has been helpful too as it encourages shoppers to splash out on summer outfits, while a flood of weddings, after people were prevented from celebrating their nuptials properly during the pandemic, has also contributed to the robust trading,’ said Mould.
‘True to form, while it has lifted expectations modestly for the full year, Next is not getting carried away. There is no value for the company in letting exuberance about its resilient performance go too far.
‘Next isn’t just playing a game here either, it is likely that things will get tougher before they get better.
‘At least people can have some confidence that Next will do the best possible job of managing whatever challenges it faces and that it should do OK where other less durable competitors have fallen by the wayside.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.
