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Next bounces back

The high-street chain is fighting to maintain its place in a dramatically changing industry
September 25, 2018

After a second-quarter trading statement spooked the market in early August, shares in high-street chain Next (NXT) bounced back after the group outperformed characteristically conservative guidance, reporting a 4.5 per cent increase in half-year sales, as opposed to the 2.2 per cent guided figure announced in May and well ahead of the 1 per cent improvement expected in January. Even better, concerns over a pull-forward effect on August sales following the hot weather in July were put to rest, prompting bosses to raise full-year pre-tax profit guidance by £10m to £727m. This will leave profits broadly in line year on year, and offer EPS growth of around 5 per cent.

IC TIP: Buy at 5,538p

But that doesn’t mean Next's bosses aren’t fully aware of the challenges currently facing the UK retail sector. Chief executive Lord Wolfson admits the market remains “volatile” and that the company is having to adapt to “rapid, structural change” with an “ever increasing volume of sales transferring online”. To that end, Next’s sales figures make for interesting reading. Despite an overall 3.9 per cent rise in brand sales, retail sales fell by 6.9 per cent, while online sales increased by almost 17 per cent. This lends support to the theory that more customers are shopping online, while the group focuses its energy on what it calls “profitable, new space” – roughly translated as properties with short lease terms and a two-year payback hurdle on capital invested. That strategy has meant that over the past 10 years retail sales have only contracted by 10 per cent despite a 32 per cent contraction in like-for-like sales. Managing lease renewals and rent has been top of the agenda, with 33 of the group’s stores now nearing their lease end. So far, bosses have managed to push net rent costs down by close to a third.

As well as focusing on the relationship between stores and online, Next has also prioritised full-price sales. It’s paid off: during the first half, total branded full-price sales rose by 4.5 per cent.

NEXT (NXT)    
ORD PRICE:5,538pMARKET VALUE:£7.74bn
TOUCH:5,536-5,540p12-MONTH HIGH:6,224pLOW: 4,148p
DIVIDEND YIELD:2.9%PE RATIO:13
NET ASSET VALUE:295pNET DEBT:£1.14bn
Half-year to 31 JulyTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20171.9030917753.0
20181.9631118655.0
% change+3+1+5+4
Ex-div:6 Dec   
Payment:2 Jan