Shares in Next PLC (LSE:NXT) rose 1.6% on Thursday after the high street bellwether raised its profit guidance for the second time this year, a reaction that some investors might view as surprisingly subdued given the company’s consistent record of outperformance.
In a trading update, Next lifted its full-year profit forecast by £14 million to £1.08 billion, just shy of Shore Capital’s estimate of £1.083 billion.
The upgrade follows a strong first quarter in which sales grew 11.4%, or £55 million ahead of previous guidance.
Shore’s David Hughes described it as “yet another upgrade” from a business that continues to deliver “impressive” numbers despite a challenging economic backdrop.
Breadth of growth
Analysts were struck not just by the scale of growth, but by its breadth. Brick-and-mortar retail rose 5.2%, online sales through Next’s own-brand increased 4.2%, and third-party LABEL sales jumped 15.7%.
International online revenue climbed 29.6%, a segment Shore sees as a key medium-term growth driver.
Even so, management struck a cautious note. Acknowledging the effect of warm spring weather on early-season buying, Next kept its guidance for the rest of the year unchanged, predicting sales growth of 6.5% in Q2 and 3.5% in the second half.
Shore called this “sensible caution” in light of weak UK GDP expectations.
On share buybacks, the broker noted that Next’s valuation currently puts it below the 8% earnings return on equity threshold for repurchases. This opens the door for a special dividend instead, if conditions persist.
Qualtiy doesn't come cheap
Next's valuation remains full, with Next trading on 16.7 times forecast earnings, but Shore maintains its ‘buy’ rating.
Analysts point to strong revenue growth, robust cash generation and high margins as justification.
With broad-based growth, prudent guidance and a focus on capital discipline, Next is once again proving why it is seen as the benchmark for the sector. Investors might be getting used to the outperformance, but analysts are not yet taking it for granted.
The shares rose 195p to 12,490p.