National Living Wage increases are expected to “outpace general inflation” this year, which could leave retailers such as Next PLC (LSE:NXT) in potential hot water, according to analysts.
While the impact of the cost of inflation on Next’s income is expected to ease in fiscal 2024 due to operational streamlining, the UK living wage could yet hit its topline, said analysts at financial services firm Shore Capital.
Analysts said the living wage “is projected to outpace general inflation” and would therefore potentially be more costly for the retailer.
While Next's costs of goods and input prices are projected to “plateau”, the living wage could “exert upward pressure on wages across various levels in the organisation”, Shore Cap’s capital markets analysts said in a broker note.
Next estimates that just 1% growth to its topline would “neutralise the cost of inflation” this year, a third of the 3% increase that it needed to soothe inflation worries last year.
The retailer revised its full-year sales and profit guidance upwards this morning to reflect increasing sales, raising its profit before tax (PBT) expectations by 0.5% over last year to £875 million, a 4% increase on prior guidance of £845 million.
Analysts said the latest profit forecast exceeds the company’s PBT consensus for fiscal 2024 of £851 million.
While Next had forecast for full-price sales growth of 1.8% for the fiscal year 2024, the retailer said it now expects to boost annual sales by 2.6%.
The clothing and homeware retail company posted a 5.4% increase in total group sales for the first half of the year and a 3.2% uplift in full-price sales from last year, while its pre-tax profit for the period rose by 4.8% to £420 million.
Next attributed the upswing to robust performance online, where it grew sales by 4.1%, while also growing retail sales by 0.9%.
Analysts anticipate further reductions in the retailer’s electricity costs and greater efficiencies across its facilities, partly due to its new warehouse facility at South Elmsall, Elmsall 3.
Shore Cap analysts also anticipate that Next’s Total Enterprise Platform initiative, which will allow other brands to use its warehouse, distribution and e-commerce infrastructure, will create “substantial cost efficiencies, especially within the Joules unit”.
Yet these benefits are unlikely to be directly filtered down to shareholders due to increased corporation tax, and the broker has not changed its 'hold' recommendation for the shares.
As a result of the rise in corporation tax, Next's earnings per share after tax are forecast to fall by 3.6%, compared with a forecast pre-tax rise of 3.2% to 723.9p, analysts said.
“Based on the updated guidance, Next's shares are currently trading on an FY24F PER of 13x, in line with the sector,” according to Shore Cap’s capital markets analysts Eleonara Dani and Clive Black, who said the results were welcome especially given the ongoing cost-of-living crisis.
Next’s current trading price today is 7,402p, up 4.17% from early trading, in line with analysts’ expectations that the market would “react positively” to the retailer’s update.