Next expects big jump in prices

Next’s (NXT) online sales performance saved it after a lockdown-driven retail collapse, and the company will resume its programme of ordinary dividends on the back of a solid revenue and profit performance. But the retailer said that it expects significant product price inflation and cut its forecast guidance for the 2023 financial year.

Chief executive Simon Wolfson said that “we went into the pandemic with a well established online business and a diverse product offer. This allowed our online business to make up for much of the sales lost we lost in retail.”

With most retail stores closed for 10 weeks of the year, it would have been disastrous if online channels failed to step up. But step up they did, as demand soared across the year for adult and children’s clothing and homeware. On a two-year basis, online sales were up by 45 per cent to £3.1bn as retail sales plummeted by 23 per cent to £1.4bn.

Gloomily, the revenue forecast for 2023 was cut by £85mn (a 2 per cent reduction) and the profit estimate by £10mn (a 1 per cent fall). While not major reductions, this is never what the market wants to hear. Management said that the cuts were due to “the closure of our websites in Ukraine and Russia, and after moderating growth expectations in some other overseas territories”.

Only time will tell if this is the extent of the forecast reductions needed. Given inflation, labour shortages, and the cost of living crisis hitting disposable incomes, the outlook for retailers is looking shaky.

Supply-side travails have bled through to price increases for the company’s products. Next said that it expects price inflation of 3.7 per cent for the first half of this financial year, and noted an increased estimate of 8 per cent for the second half. The latter is a mix of 6.5 per cent on fashion products and 13 per cent on homeware and furniture. Whether consumers will be happy to go along with such rises remains to be seen. Expanded inventories and receivables reflect the increase in trading activity, although profitability levels, as ever, are tied into the level of discounting through the year. This consideration takes on greater significance given the accelerated fall in discretionary incomes.

Chris Beauchamp, chief market analyst at IG Group, said that “if the £10mn shaved off forecasts is the limit of their pessimism then there might be some hefty upside in the shares over the medium term”. Consensus analyst forecasts have the shares trading on 11 times forward earnings, below the five-year average of 14 times. Despite the difficult outlook, the long-term investment case remains solid and the online performance is reason to cheer. Buy.

Last IC view: Buy, 8,336p, 29 Sep 2021