Next PLC (LON:NXT) upped its full-year profit guidance this morning after the high street fashion retailer topped forecasts with its first-quarter numbers.
Full price sales in the 14 weeks to May 7 rose 6% as an 18.1% increase in online sales offset a 4.8% decline at stores.
READ: Next lifts full-year forecasts as sunny weather boosts Q1 sales
In total, the FTSE 100-company raked in around £40mln more sales than it had projected, which Next expects will add another £12mln to the bottom line, come the end of the year.
The news sent shares soaring by almost 7% to £56, adding another £500mln to the company’s market capitalisation in the process.
Weak Q1 comparatives
But are investors getting a little bit carried away? Some analysts think so.
You only have to look at this morning’s statement, when Next’s refreshingly honest chief executive Simon Wolfson openly admitted that the first-quarter performance was “flattered” by a poor showing a year earlier.
Back in March, the company told investors that sales for the rest of the year were unlikely to be as strong as the first quarter. “We still believe this will be the case,” read today’s statement.
Summer shoppers already done
Next attributed the first-quarter sales beat to the “unusually warm weather” seen towards the end of April and into early May.
But does that mean the summer shoppers have shot their bolt early, which could weigh on second-quarter sales, traditionally a strong period for clothes retailers?
“If, as Next seems to believe, the strong first quarter reflects shoppers pulling forward their summer purchases to take advantage of the recent warm weather, then Q1’s positive results will come largely at the expense of later quarters,” said Hargreaves Lansdown equity analyst Nicholas Hyett.
About to encounter competition from Asos and Boohoo?
Given the current malaise on the UK high street, Next has been trying to reposition itself and grow its online presence.
The move seems to be working, with online sales growth offsetting sharp in-store declines, and online now accounts for almost half (47%) of the business – unthinkable just a few years ago.
“If the majority of group sales continue coming from the online space, its competition perhaps now lies not with UK high street retailers, rather with online retail giants such as ASOS, boohoo, etc.,” said Accendo Markets research analyst Artjom Hatsaturjants.
But can Next compete with these well-established online players?
At £5bn, Asos PLC (LON:ASC), is rapidly catching Next in terms of market value, despite being founded 136 years later. Boohoo isn’t a tiddler anymore either at £2bn, and that wasn’t set up until 2006.
Until it rids itself of its onerous lease agreements for its retail stores, Next’s margins are likely to suffer in comparison to its soon-to-be rivals and their leaner cost bases.