Next braces for 'very challenging' year

Shares in Next (NXT) slid by 7 per cent in the wake of its results, which warned of a “very challenging” year ahead. “The combination of inflation in our cost base and top-line sales [that] are likely to edge backwards is uncomfortable,” the retailer warned, predicting a 1.5 per cent decline in full-price sales in 2023. It expects that profit before tax will fall by 8.6 per cent to £795mn in 2023

It’s not all doom and gloom, though. The group reported a “significant reduction” in the cost of container freight, and the price of goods in the country of origin has also fallen. As a result, price rises in the second half of the year will be “materially lower” than initially feared. 

So far, though, Next’s customers have reacted to price rises fairly well. In the year to 28 January 2023, trading sales were up 4.8 per cent when you exclude lockdown periods. As such, underlying profit before tax rose by 5.7 per cent to £870mn, beating the group’s upgraded guidance by £10mn. 

Growth was driven by in-person shopping. Retail sales increased by 30 per cent year on year to £1.87bn, while online sales fell by 2 per cent to £3bn. This discrepancy is even more apparent when you look at profit figures. Retail profits more than doubled to £241mn, while online profits tumbled by 23 per cent to £467mn, hampered by higher warehouse and distribution costs, and investment in technology. 

Next’s online margins have been narrowing for some time, and are currently 4 percentage points lower than pre-pandemic levels. This is not straightforwardly negative, however. Much of the reduction is down to Next’s ‘Label’ business, which sells non-Next branded products – think River Island, Nike and Superdry – through its own websites. These products have either been bought wholesale or are sold on commission.

While this part of the business is lower-margin, Label’s sales account for about a third of Next’s online revenue, and the division is growing fast: Label's full-price sales have doubled over the past three years. Moreover, this might drive more customers to Next’s own products.

This is not the only way Next is diversifying. In 2021, it acquired a 25 per cent stake in Reiss, the second acquisition of any material size in 30 years. Since then, it has made nine other investments, including in JoJo Maman Bébé, Sealskinz, Joules, MADE.com, Swoon, Aubin, and stakes in the UK franchises of Victoria’s Secret and Gap, plus a further 26 per cent stake in Reiss. 

This is quite a change of tack and feels risky – particularly given that many of these brands were in dire straits before Next swooped in. Hold. 

Last IC View: Hold, 6,518p, 5 Jan 2023