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Next raises full year profit guidance after warm weather boosts first-half sales

Next remains cautious on its outlook for the rest of the year amid a tough retail market and uncertainty on the UK economic outlook

Next
Next is making preparations for a no-deal Brexit scenario

Next Plc (LON:NXT) shares jumped after raising its full-year profit estimate as an unusually warm summer led to better-than-expected first-half trading.

In early trading, shares were up 8.4% to 5,556p. 

The fashion retailer lifted its central guidance for annual pre-tax profit by £10mln to £727mln, broadly in line with last year’s profit of £726.1mln. However, Next said it remains cautious on its outlook for the second half amid a tough retail market and uncertainty on the UK economic outlook.

“We believe that the lion's share of range improvements had been delivered for the second half of last year, which is why we are budgeting for lower growth rates in the second half of this year," it said.

In the six months to July, pre-tax profit increased 0.5% on the year to £311.1mln and total sales, including markdowns, rose 3.9% to £1.9bn from £1.8bn.

Full price sales in the first half grew 4.5%, ahead of the 1.0% guidance issued at Next’s last trading update in August.

READ: Next to post improved first-half sales but valuation hostage to Brexit uncertainty, says Jefferies

Next said it did not experience the loss of sales in August that it had predicted as customers continued to stock up on summer ranges during the warm summer months. 

Online sales growth offsets slump in retail       

Growth was led by the online division, which achieved a 16.0% increase in full price sales and a 16.8% gain in total sales, including markdowns, to £892.3mln.

Operating profit in online gained 21.2% to £163.3mln as margins increased to 18.3% from 17.6% last year.

At retail stores, full price sales dropped 5.4% and total retail sales, including markdowns, declined 6.9% to £925.1mln as weaker consumer confidence and online competition continued to hurt high street retailers. On a like-for-like basis, sales declined 10%.

Operating profits in retail fell 23% to £73.2mln as the net margin shrunk to 7.9% from 9.6% last year due to higher central costs and inflation.  

Next Finance, the division that provides credit to customers to purchase products at the company, delivered a 12.5% increase in total sales to £122mln but net profit fell 1.3% to £57.9mln.

Tough transition from retail to online, says Next 

In response to the growing shift towards online shopping, Next has been transitioning from retail to online and the company admitted this process has “not been painless and represents a continuing battle”.

“The juxtaposition of retail's fixed cost base with online's variable costs and lower third-party margins is challenging,” the group explained.

The company said to make up for the profit on a 5% loss of sales in the retail business, online sales at current average margins would have to grow by 8%.

This year the group expects retail sales, at just under £2bn, to contribute less than half of the total sales and only 30% of group profit for the year.

Next prepares for no-deal Brexit scenario

The central guidance for full price sales for the year is 3.0% growth, accelerating from the 0.7% increase reported last year, with online sales expected to be up 13.2% and retail sales estimated to fall 6.0%.

"On the one hand this consistent raising of guidance throughout the year indicates positive momentum, but on the other, it tends to suggest that Next was overly cautious after suffering its worst year in 25 years in 2017," said Neil Wilson, chief market analyst at Markets.com. 

The retailer declared a dividend of 55p each, up 3.8% on the previous year.  

In preparation for Brexit, the company said it is setting up the administrative, legal and physical infrastructure that will be needed to operate effectively if the UK and EU are unable to agree on a free trade agreement.

Next expects all the necessary arrangements will be in place by March of next year when the UK leaves the EU.

Richard Hunter, head of markets at Interactive Investor, said: "Of course, the current challenges facing retailers are legion, and Next has surely mentioned most of them in this statement.

"The anticipation of these challenges should put Next in a better position to deal with them, providing that it can avoid some of the self-inflicted wounds of the past,

"In the meantime, the intense competition within the sector, which has accounted for the demise of some high-profile names, means that the company’s laser focus on managing the transition cannot lapse at any given time."

Quick facts: Next PLC

Price: 6324 GBX

LSE:NXT
Market: LSE
Market Cap: £8.42 billion
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