Third time lucky: Next boosts forecasts again

Next (NXT) has upgraded its profit guidance for the third time in four months, on the back of unexpectedly strong demand. The retailer now thinks full-price sales growth will reach 2.6 per cent in the year to January 2024, up from previous guidance of 1.8 per cent. It has also increased its profit before tax forecast from £845mn to £875mn, which would represent a 0.5 per cent increase on last year. The retailer previously feared that profits would shrink, given the cost of living crunch and its own swelling cost base.

A number of pleasant surprises in the six months to July fuelled Next’s optimism. For starters, sales have been better than expected, with total sales up 5.4 per cent year-on-year. This is partly the result of popular, broader product ranges, but management said exceptionally warm weather in late May and June “significantly” boosted demand for summer clothing. Nominal wage increases, combined with the robust employment market, also kept customers spending – particularly online. 

Top line growth was not the only positive, however. Costs were also lower than Next expected, and the retailer is confident it can now deliver £46mn more savings than originally planned, which should easily offset an extra £16mn of non-recurring costs and provisions. Fabric, factory gate and freight price inflation is also on a downwards trajectory, and the group has revised its estimate of autumn/winter 2023 cost price inflation down from 3 per cent to 2 per cent. 

Next is famously cautious, and today’s results are no different. It has warned that sales growth is likely to moderate over the next few months, and believes retail full price sales in the second half will be down 1.7 per cent versus last year. The beneficial effect of pay rises earlier in the year “will begin to wane as monthly inflation erodes their benefit”, it said, while the employment market is also likely to soften.

Next is a tightly managed company and has been overly cautious about its prospects in the past, but we share its concerns about the economic backdrop. And while its forward price to earnings ratio is slightly lower than its five-year average – 12.7 versus 14.1 – it doesn’t look cheap enough to buy just yet. Hold.

Last IC View: Hold, 6,310p, 29 Mar 2023