Next expects higher profits as sales prove better than expected

Next delivered its usual very long report covering its half-year performance on Thursday and it showed that the company is continuing to see rising sales and profits. And it has revised guidance for the full year upwards. 

To start, looking at the headline figures, brand full-price sales rose 3.2% in the six months to July and total group sales were up 5.4% at £2.638 billion. Profit before tax rose 4.8% to £420 million but profit after tax fell 2% to £322 million. 

Its guidance for the year has been revised to profit before tax rising 0.5% to £875 million. Previous guidance had seen profit on that basis of £845 million. 

Breaking down the H1 figures by division, the company said Online sales rose 5% to £1.498 billion and Retail sales (through its physical stores) rose 0.5% to £885 million. Finance sales were up 7.1% to £143.1 million and total Next trading sales were up 3.5% at £2.526 billion.

As far as profits are concerned, Online profit rose 11.1% to £245.5 million and Retail profit rose 0.6% to £101.2 million. 

The two quarters that made up the half saw very different performances with Next brand UK sales down 7% in Q1 but up 6.6% in Q2. For its Label UK business, those figures were a drop of 2.1% followed by a rise of 2%. For UK Online, it was a drop of 5% and a rise of 4.7%. And for Overseas, it was a Q1 rise of 8.1%, followed by a surge of 31.1% in Q2.

HIGHER SALES

The company said sales were “better than expected”. They were boosted as Online service “significantly improved; costs are lower than expected and, although it is early days, and there have been bumps along the road, all three streams of new business are showing signs of promise”. 

Overseas, in particular, has “taken a big step forward in the second quarter”.

It’s been “very happy with the performance of our ranges”, but in a pretty realistic assessment, it added that “the extent to which we have exceeded our expectations cannot be explained by range improvements alone”. 

It thought H1 full-price sales would drop 3% and they finished by rising 3.2%. It admitted to being “overly cautious about the prospects for sales in the current year” as it “underestimated the support nominal wage increases, and a robust employment market, would give to our top line. We also believe the exceptionally warm weather in late May and June served to significantly boost sales of our summer clothing at a critical time (a factor we need to bear in mind when it comes to our forecast for next year)”.

And further highlighting the importance of the weather, it added that “the dramatic difference between the performance of earlier and later months is partly down to the timing of favourable weather (in contrast to May and June, March and April were marginally colder and wetter than usual)”.

NEWNESS IS KEY

On the product front, it noted that “trends are moving faster” and this has become crucial to driving sales higher.

The company said customers “are willing to adopt new looks more rapidly than they have been for some time (even in areas that have moved more slowly in the past, like Homeware). Gone are the days when ‘moving on’ last year’s bestseller would underpin the success of this year’s range. In almost every product category, this year’s bestseller will be completely new. So the overriding message to our product teams is: keep the newness coming; be brave in backing emerging trends; and remember that, in fashion, no amount of data can beat the human intuition of a brilliant product professional. Because if you test and wait-and-see, you will be too late”.

The improvement in its stock availability, speed and reliability of its Online service is “one further factor which may have contributed to our sales performance over the last six months,” it said.

Over the last four years Online sales have “significantly exceeded” its long-term projections, which put “huge pressure on warehouse picking space and required aggressive recruitment in a constrained labour market”. It has boosted its warehouse space to help cope with this and is handling more orders via its stores. 

INTERNATIONAL GROWTH 

Looking beyond the UK, Next said it made excellent progress in the last six months with sales up 18% (or 15% in local currency) to £371 million and with operating profit up 132% at £53 million. As with the UK operations, its international business benefited from improved stock availability, as well as higher and more effective marketing spend.

It has also created a new department led by an Overseas Director, dedicated to franchising, licensing and wholesale in regions where it hasn’t been successful, reaching customers through its own websites. These regions include India, The Americas, Indonesia, Japan and South Korea. It also has a wholesale trial under way with a major overseas department store operator.