Yet another set of next-level numbers has underlined the group’s unparalleled understanding of the market in which it operates and its ability to capitalise on new opportunities.
Pre-tax profit of £1.01 billion represented a 10.1% on the previous year and will attract headlines as a new psychological threshold has been crossed. However, the group is keen to play down the milestone as being little more than a number, with its focus on further growth (and the fact that profits can fluctuate) being undiminished.
There are any number of positives emanating from this report, and the growth of the international business is particularly notable. Indeed, the overseas offering is one which holds up some interesting prospects.
The group had previously noted that international tastes in clothing are beginning to converge, not least of which is due to the increasing visual power, appeal and presence not just of the internet, but also the rise of streaming services which are now increasingly used by younger audiences.
As such, the group is making strides into new territories with a hybrid approach. For practical reasons, far-flung markets such as the US and Asia have proven difficult in terms of delivery, and Next (LON:) is therefore seeking to establish a number of high-profile third-party partnerships to enter those regions.
Over the period, Next has jumped on its increasing international presence and has increased its website functionality, improved its digital marketing and developed third-party relationships.
The overseas third-party distribution network enables the Next brand to reach new markets, and even at this relatively early stage of its ambition the group has highlighted a rise of 350% in international website sales over the last ten years and an increase of 25% in full-price online sales over the last year.
The group has a very simple and clear appreciation for product (the brand) and platform (enabling third-party sales) being its current drivers. This adds to what has been another successful period. Aside from the headline profit number, group sales rose by 8.2% to £6.32 billion, including a hike of 5.8% in full-price sales.
This was achieved despite a marginal dip of 2% in , which was more than offset by strength elsewhere, such as an increase of 15% in third-party brand revenues.
Indeed, over recent times the group has leaned towards full-price sales at the expense of discounts, and the strategy has paid off with the company previously noting that there is an increasing proportion of customers who are buying fewer, but more expensive items, which potentially brings new opportunities for Next slightly higher up the price chain.
The financial health of the company is another focus on which progress has been made. Net debt has reduced from £700 million to £660 million and is forecast to fall further in the coming year to £550 million. This should also enable the delicately balanced shareholder return programme to continue.
Based on its own calculation, Next estimates whether excess capital is best deployed through either share buybacks or dividends. In this period, a marginal increase to the dividend leads to a projected yield of 2.3%, not traditionally one of the stock’s attractions although buybacks provide an alternative when appropriate.
Next has a reputation for under-promising and over-delivering, but its outlook statement this time is perhaps unusually upbeat. At the same time, no release would be the same without some sort of guidance upgrade.
The first eight weeks of the new year have been ahead of expectations to the extent that the group is upgrading its estimate for full-price sales to growth of 6.5% for the first half and 5% for the year as a whole, both against previous levels of 3.5%, with the additional £67 million of wage cost inflation and increased National Insurance payments being comfortably offset. For the full-year, Next estimated that pre-tax profit will rise by 5.4% to £1.07 billion.
The Next naysayers have missed out on some stellar returns, but may not yet have entirely missed the boat. The share price has risen by 122% over the last five years and by 59% over the last three. The performance over the last 12 months has been a more pedestrian increase of 7%, as compared to a gain of 9.6% for the wider , as the price has caught up with its historic valuation, giving extra punch to the warm reception which the shares have received at the open.
This has in part led to a market consensus which remains stubbornly stuck at a hold, albeit a strong one, which has been the case for some considerable time. Even so, if this level of inexorable progress is maintained as has been the case to date, those who doubt the company’s prospects may continue to do so at their peril.
