- Christmas season like-for-like sales come in higher than expected
- Management raises profit forecasts once more for year to January 2025
- Initial guidance for fiscal 2025 fails to beat forecasts, however
- Company faces cost increases in the year ahead
“The latest trading update from Next brings yet another upgrade to earnings forecasts, the ninth in the past two years, and as a result management expects the company to generate record profits in the year to January 2025,” says AJ Bell investment director Russ Mould. “A further increase in earnings is expected for the financial year to January 2026 as well, but the modest forecast rate of increase, the diminishing scale of the forecast upgrades and the absence of an upside surprise for the coming year may help to explain why shares in the retailer still stand below September’s all-time high.
“These figures are a further reminder, as if one were needed, that retailers can thrive, regardless of what the weather does, if they sell the right product at the right price point in the right format for the target customer base. Doing this correctly will improve stock turn and sell through, reduce the need to discount and in turn help profit margins and cash flow.
“Next seems to have the knack of getting this right and in this respect its key performance indicator (KPI) of growth in full-price sales is particularly helpful. A 6.0% increase in full-price sales in the nine weeks to 28 December handily beat the expectation of a 3.5% advance laid down by chief executive Lord Simon Wolfson alongside October’s third-quarter update.
Source: Company accounts. Financial year to January.
“While many retailers complained about the rotten British weather, a weak economy or political uncertainty in 2024, the FTSE 100 firm has got on with the job and now raised guidance for both sales growth and profits on no fewer than nine occasions in the past two years.
Source: Company accounts.
Source: Company accounts.
“The company now expects to generate pre-tax income in the 12 months to January 2025 of £1,010 million, with further progress to come in fiscal 2026, to £1,046 million, although the coming year will benefit to the tune of £20 million from having a fifty-third week.
Source: Company accounts, Marketscreener, management guidance for 2025E and 2026E. *2024 excludes capital gain on Reiss. Financial year to January.
“That wrinkle may be one reason why a forecast of record-high profits is not translating into new all-time highs in the share price, although it is responding favourably to the latest forecasts. This may be analysts taking a view that Next is sandbagging the forecasts for fiscal 2026, to set itself up for a further range of forecast upgrades, should all go to plan, while it may also be relief that increased wage costs and national insurance contributions in the coming year are not going to have a seriously detrimental impact.
“Lord Wolfson quantifies these extra costs at £67 million, a figure which the company expects to cover through a 3.5% increase in full-price sales and also £73 million in cost savings that relate to electricity, increased efficiency across stores and warehouses and product sourcing.
“Analysts and shareholders may also be pleased to see how Next continues to generate copious free cash flow. This enables the company to invest in its competitive position, such as in its brand, marketing and technology, repay debt (so it does not have to be refinanced at higher interest rates) and still have plenty left over to return to shareholders.
“A £250 million bond is due to mature in August. It has a coupon of 3.00% so the company has the flexibility to pay that off and not raise any fresh debt, although it may choose to borrow, presumably if interest rates fall from their current levels.
“Either way, after paying out £258 million in dividends and running £326 million in share buybacks in the year to January 2025, Next expects to distribute £276 million in dividends and buy back a further £314 million in stock in the coming 12 months. That aggregate cash return of £590 million equates to around 5% of the company’s current stock market capitalisation.
“More impressively still, total cash returns, via dividends and buybacks, now total £3.3 billion over the past decade, no mean sum when Next’s stock market capitalisation was £10 billion in January 2015.”
Source: Company accounts, Marketscreener, management guidance for 2025E and 2026E. Fiscal year to January.
