Next for income now and recovery later

True, the free cash flow that funds the fat prospective payout will be in jeopardy if profits deteriorate more severely than expected (management says trading at the lower end of the expected range should be enough to support the special payouts this year). But Next is taking steps to mitigate tough high-street trading and sterling-related cost pressures. It is working hard to eliminate costs in order to protect margins and last year more than offset cost increases of £41m with £64m saved - £22m was from improved net interest income and bad debt following a one-off extension of repayment terms. This year costs could rise by as much as £36m again, and company bosses say they've already identified another £26m-worth of savings, albeit £10m of this is a non-cash change in depreciation.

Management has also suggested that pricing pressure could ease by the second half of 2018, while other industry commentators believe wider inflation might also benefit wage growth, and therefore spending power for customers.

Next could benefit from falling rents too (the store estate's average lease length is 7.5 years with half its leases due for renewal in under five years). The rise of internet shopping means high-street landlords are increasingly willing to offer more attractive terms to convince retail businesses to hold on to town-centre premises. Next has also undertaken thorough analysis of possible scenarios where recent like-for-like sales declines continue for a decade and rents don't fall. Even based on its worse case of 6 per cent annual falls, it believes the effect on store profitability would be limited to about a 50 per cent decline, taking it to 10 per cent before central overheads. Admittedly, this would take careful management, including taking on no new space and closing unprofitable stores and sites with onerous leases. But it's encouraging to see the board running several 'stress tests' on this front, and trying to prepare for the worst even though management sees such dark prospects as highly unlikely.

Much better prospects are offered by Next's directory business, which gave the retailer an early-mover advantage in terms of online shopping. Next Directory operating profits rose 9.6 per cent last year and margins were up from 24.4 per cent to 25.7 per cent, mainly due to improved interest income. First-quarter Directory sales also jumped by 3.3 per cent. But with Directory comes exposure to credit-based customers, and while 2016 interest income benefited from the extension of repayment terms, the broader trend is of declining credit use. However, encouragingly customer churn has been falling. Last year, the customer base contracted by 3 per cent overall, but only by 0.8 per cent during the final quarter.

Those worried about Next's decision to hand back cash rather than reinvest it should also be comforted by the fact that management has outlined an £11m investment programme for the directory business, which will allow customers to have a more personalised experience online with more convenient delivery and stock options, too.