Next has stronger than expected festive season, raises guidance

It’s always encouraging when a trading update starts with the words “better than anticipated”. And so it was with the Next update on Thursday with the company saying that full-price sales during November and December beat its expectations.

Not that it should come as too much of a surprise as Next has consistently smashed both its own and analysts’ forecasts over the years.

So what actually happened at the ever-expanding fashion, homewares and beauty retailer? In the nine weeks to 30 December, full-price sales rose 5.7% compared to expectations that they would increase by 2%.

It meant the company raised its current-year pre-tax profit guidance by £20 million to £905 million, which would be a 4% increase on the year. And full-price sales should also be up 4% at £4.78 billion.

But the company is staying cautious on its sales guidance for the following financial year and said full-price sales on continuous business should be up a smaller 2.5% in the year ahead, although accounting for recent acquisitions, group sales including subsidiaries should rise 6%. 

Looking back at those festive season sales, the company said Online sales rose 9.1% (and 7.7% in the second half as a whole up to 30 December). Sales through Retail stores rose 0.6% in Q4 so far and were flat for the second half. 

Every single week during November and December saw sales in positive territory except for the week beginning 10 December when they were down by 2%.

The company said that clearance sale rates should be broadly in line with last year even though the company went into the clearance period with 12% less surplus stock than the previous year.

It also provided quite a detailed look at what it’s expecting for the year ahead. It’s worth noting that it said in future, it will be excluding the amortisation of the brands it buys from its headline profits. And for the purposes of comparison, it will start excluding them for the current year too. The effect of this change is to add £10 million to the current year’s headline profit (taking that aforementioned £905 million to £915 million) and £19 million to next year’s headline profit.

Technicalities aside, one thing this tells us is that the company expects it will continue to be active on the acquisition front in a way it has been in the past few years.

But focusing on its core business, we’ve already said it assumes that full-price sales for the core Next business (which includes Retail, Online, Label and Next Finance interest income) will be 2.5% higher.

It reached this conclusion as it said that on the face of it, the consumer environment looks more benign than it has for a number of years, although there remain significant uncertainties.

The positives include wages rising faster than prices, which should make consumers feel better about spending. It’s also seeing cost price inflation in its own products diminishing, mainly due to falling factory gate prices. Management believes this will allow it to maintain zero inflation in selling prices along with a small increase in gross margins. This is the first time in three years that input prices have been stable.

There are still negatives of course, such as reduced employment opportunities in the wider economy given that UK vacancy rates have been falling in the last six months. Ongoing high mortgage rates will continue to affect consumers too. And there are supply chain risks such as difficulties with access to the Suez Canal that could delay stock deliveries in the early part of the year.

But regardless of those challenges, Next looks likely to overcome them just as it has done with the challenges of the past few years. It remains one of the best run UK retailers out there.