Next shares jump on better than expected trading

Shares in Next rose 9% on Thursday after the company unveiled better-than-expected trading figures for the run-up to Christmas.

Full price sales at the fashion retailer increased by 4.8% in the nine weeks to 30th December compared to the same period last year. Next had previously expected a fall in sales of 2% for the period but instead recorded a gain of £66 million. As such, the company has raised its pre-tax profit guidance for the full-year by £20 million to £860 million - or an increase of 4.5% on the same period last year.

Covid effect ‘underestimated’, says Next

In the fourth-quarter, online sales rose by 0.2%, while retail sales increased by 12.5%. Management believes it underestimated the negative effects of the Covid lockdowns on sales last year, while it also benefited from increased sales of winter clothing and improved stock levels during the cold spell this December. However, the retailer says it still remains “cautious” on the new financial year ending January 2024. The company continues to expect full price sales to dip by 1.5% and for pre-tax profits to fall 7.6% to £795 million for 2024. This is due to the cost of living crisis, inflation and increased consumer mortgage costs.

Next: inflation to peak next year

Like most retailers, Next expects operating costs to increase this year, as wage and energy costs increase. However, management anticipate general UK employment levels to remain “strong” in 2023 and, as such, consumer demand for its products to continue. The retailer also expects cost inflation to peak in the spring at 8% and dip to 6% in the second-half of the year, mostly due to the stronger dollar.

Meanwhile, the company intends to pass on cost increases to consumers, with spring and summer ranges priced at 8% higher than the previous year and autumn/winter ranges 6% higher. However, factory gate dollar prices are falling, with Next paying $1.27 to the pound for merchandise against $1.39 last year due to falling global demand.

Next also plans to return £220 million to investors in the year ahead, unless it makes major investments. The company recently bought out high-end retailer Joules from administration.

Analysts at broker Barclays cut their price target on the shares in November from 8,100p but still forecasts they could reach 7,000p. Meanwhile, analyst Caroline Gulliver at broker Stifel thinks that Next is better-placed than other retailers to weather the macro-economic storm.

Shares in Next have had a good run since October but are down 16% for the year to 6,510p. They remain a long-term buy, given the retailer’s likely resilience in the face of the cost of living crisis and inflationary environment. The company announces full-year results on 29th March.

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