Next shares reach all-time peak on record profit

Next (NXT) investors had probably got used to guidance upgrades from the retailer, with a string of earnings uplifts (the latest one coming in January) on the back of a better-than-expected sales performance boosting sentiment. There was no upgrade in the annual results, with management sticking to its forecasts for 2025 of underlying full-price sales growth of 2.5 per cent, a 6 per cent rise in sales and a 5 per cent increase in pre-tax profit. But this must be seen in the context of a year when the business "materially outperformed" original expectations and delivered a record profit, which helped the shares approach their highest ever level on results day.

Unlike last year, revenue and profit growth was driven by the online performance rather than in-person shopping. Online sales were up 5.1 per cent to £3.16bn, while retail sales remained flat at £1.87bn. Operating profits rose 10.7 per cent to £517mn for the online business, compared with 1.7 per cent growth to £245mn for retail.  

Management expects lower selling prices going forwards, as falling inflation and rising real wages support the demand outlook. Prices on like-for-like products are down 2 per cent, with a 0.5 per cent fall expected in the second half of this year. Higher freight costs have been factored in, and investors will be pleased to hear that the group expects no "material adverse impact from stock delays" relating to the situation in the Suez Canal. 

The statutory profit posting was boosted by a £109mn exceptional gain on the acquisition of Reiss. Next raised its stake in the business by a fifth to 72 per cent, with other investments made in the year including a 97 per cent position in FatFace and the purchase of the intellectual property of Cath Kidston. Such investments certainly aren't risk-free, but highlight that Next isn't resting on its laurels when it comes to brand expansion. 

Progress with total platform (TP) – which lets other brands use Next's panoply of services – was notable. Guidance is for TP to deliver £77mn of profit this year, around 8 per cent of the group total, compared with zilch three years ago. 

The shares change hands at 14 times forward consensus earnings, in line with the five-year average. We think this makes them fully priced, with the market up to speed with the growth outlook. Hold. 

Last IC view: Hold, 7,328p, 21 Sep 2023