Retail bounce boosts Next

Next (NXT) suffered more than most during the prolonged lockdowns last year, followed by uncertainty over supply chains amid large backlogs at ports and shortages of HGV drivers. The combination of these factors made the company’s like-for-like performance compared with 2020 awkward to assess and, although the market still reacted positively to an upgrade to sales forecasts for the full year from 6 per cent to 10 per cent. However, there were notes of caution about how its logistics situation in the run-up to Christmas would materially affect its service. The chief executive described the results as: “A  good news, bad news, good news sandwich”.

Chief executive Simon Wolfson went to great lengths to explain the issues that the company faces in its supply chain. “The problem is the availability of seasonal staff in our warehouses in the run-up to busy times of year, particularly of female staff.” The potential shortage of seasonal workers could affect how quickly Next can fulfil orders in the run-up to Christmas, although he added that the company can mitigate the worst effects of this by lengthening order fulfilment to reduce the stress on its warehouse capacity at peak times.

As with all companies, the availability of HGV drivers has been a hot topic recently. While costs have increased, there hadn’t been any operational issues with the mix of in-house and external contractors that Next uses to deliver its goods, Wolfson said. Despite this, Next’s overall stocking levels are down approximately 12 per cent compared with 2019, although management said that order fills with similar alternatives have meant that the online operation can cope with a shallower stock base.

Management also forecast that the situation will improve as there are signs that bottlenecks at ports are starting to ease. Next references the fact that the prices on forward contracts for shipping have started to fall as more capacity comes online. The other good news in Next’s metaphorical sandwich was that the legacy costs from its physical stores fell much faster as a result of the pandemic, mainly due to the £11.5m fall in total rent costs at a higher run rate of 50 per cent.

Betting against Next has always been fruitless as the business has managed multiple changes over the years to accommodate new retail trends. The shares have largely trod water so far this year at a forward rating of 17 times consensus forecasts, but fundamentally Next always delivers – even if it takes time to fulfil the order. Buy.

Last IC View: Buy, 7,962p, 21 Jul 2021