Raised profit forecasts from retailers in this tough economic climate shouldn’t really be happening.
But, when Next PLC (LSE:NXT) is involved, we are not talking about your average run-of-the-mill retailer.
In a trading statement released today, the FTSE 100 company boasted that second-quarter sales beat previous expectations, enabling it to confidently boost its total profit estimates for the year by an extra £10mln.
Admittedly, that's not a massive upgrade, but it says a lot that management is able to plough through the current problems on the high street unaffected.
A marginal increase in online sales was more than compensated for by growth in its brick-and-mortar business as consumers flocked back to the stores, highlighting its ability to successfully operate both online and on the high street.
Next is renowned for under-promising and over-delivering. In 2022, it slashed forecasts at the start of the year as Russia marched into Ukraine before raising them again on Thursday.
Even more impressively, the slightly loftier targets come at a time while competitors are struggling.
Online fashion retailers ASOS and Boohoo issued profit warnings recently as consumers clawed back on discretionary spending, while the likes of Topshop left the high street in September 2020.
The big undersell
As mentioned above, Next has somewhat of a reputation for underpromising and over-delivering when it comes to making forecasts.
Of course, this means when subsequent updates come around the retailer can say it performed better than expected, which in turn sends the stocks higher (although shares were unmoved after today’s update).
Richard Hunter, head of markets at interactive investor and a markets veteran, gave a very big nod to this habit when he said: “Two things are close to becoming expected from Next updates- an upgrade to profit forecasts, along with a cautionary outlook to temper overexuberance.”
And that is exactly what happened.
Profit guidance was raised, but the group urged on the side of caution for the second half of the year.
“The company does not expect the 'weather windfall' which drove sales higher to repeat in the second half of the year, while the general inflationary outlook is likely to persist,” Hunter added.
Now, this obviously creates a conundrum and a bit of a dilemma as to whether Next is overperforming, or whether it is simply hitting expectations but giving the impression of overperforming with its cautionary outlook.
Either way, raised expectations are always met kindly by investors - big and small.
Market share gains
Next, indisputably, is a household name in the fashion retail sector.
A look at its share price movement over the last five years, up 54%, would tell you how successful and popular it is as a business.
This, in large part, is down to it doing all the basics of being a well-run business, like good stock control and pricing strategy.
However, there are some analysts who will argue that, especially in the years since the pandemic, Next has been a beneficiary of forced closures by some of the smaller retailers.
“[It] has also benefited from market share gains as competitors like Topshop and Debenhams have disappeared from the high street,” said Russ Mould, investment director at AJ Bell.
“Much of the ‘renaissance’ of Next Retail is said to be merely down to the number of competing stores that have closed over the last three years,” said Eleonora Dani, an analyst at investment group Shore Capital.
Hunter supports this idea, adding “a deteriorating UK economy has resulted in several examples of slowing retail sales and, while some of the competition may have been removed over the last few years as smaller retailers have gone to the wall”.
Dani highlights figures from the Office for National Statistics, which showed total money spent in all UK retail clothing stores is down 6% compared to three years ago.
That may be a sign of fading consumer confidence, but also consumers have fewer options on where to spend and decide to keep their money in their pockets.
No secrets, just a well-run business
Analysts, journalists and investors will all have their ideas on what Next does differently from the others.
Often, the correct answer is the obvious one, and that is the case here. Next are just an extremely well-run business.
“For me, it’s just the execution, which is superb,” said Neil Wilson, chief market analyst at Markets.com
“Next remains a well-managed company with an experienced management team and tight stock and cost control,” Dani added, with the company informing investors surplus stock levels reverted back to pre-pandemic levels, another positive line in a strong update.
“Bosses at Next are well-versed in how to operate successfully as a public company, demonstrating fluency in the art of expectation management,” Mould added.
“This helps explain how, right in the middle of the worst cost-of-living crisis in a generation, the company has been able to deliver better-than-expected numbers.”
No secrets at Next. Experienced leadership and doing the fundamentals well is key to its success.