Another profit upgrade gives Next shares further boost

Even within a brief trading statement, Next (LSE:NXT) was able to pack the punch that it is increasing its profit estimate for the fourth time this year.

At the half-year numbers in September, Next raised its pre-tax profit estimate from £845 million to £875 million. Today the guidance was increased further to £885 million, putting further light between its predicted performance and the previous year’s result of £870 million.

• Learn more: SIPP Portfolio Ideas | How SIPPs Work | Transfer a SIPP

The latest boost to estimates follows full-price sales growth for the quarter of 4%, compared to the expected 2%, driven largely by an increase of 6.5% in online sales, which account for almost 60% of the overall group figure. With its typically guarded outlook in mind, Next predicts growth of 2% in the final quarter, which would take the yearly number to 3.1%.

In mid-October, the group announced the acquisition of FatFace for £115 million, which is not expected to have a material impact on earnings this year. It does, however, echo the strategy which Next has been pursuing, including the opportunities arising from the enhanced Total Platform, extending its overseas reach and new product offers arising from its third party and licensing capability. All are largely dependent on the technology which it has been busy developing, enabling for example the acquisition of new brands via its website which, although lower margin, are also significantly lower risk.

The improved quarterly performance and volatility within its sales performance is one which Next ascribes to changing weather conditions over the period rather than any noticeable change in consumer behaviour. Even so, this remains something of an overhang on the retail sector given the uncertain economic outlook, especially for the likes of Next which has eschewed discounting its products in favour of a concentration on full-price sales.

• Share Sleuth: the big ballsy contrarian decision I’ve made
• Wild’s Winter Portfolios 2023: winners revealed

The shares are certainly on a roll given its recent ability to confound expectations, and have risen by 40% over the last year, as compared to a gain of 2% for the wider FTSE100. There remains work to be done, though, since the two-year performance remains negative, with the shares down by 14% and some way off the peak of £81 achieved in November 2021.

Nonetheless, Next has long been regarded as a well-oiled machine with the determination to drive progress, and a recent upgrade of the market consensus to a 'cautious buy' reflects warming appreciation of its prospects.

Market snapshot

US markets edged higher in the final October trading session, although this was not enough to stem the third consecutive month of declines for the main indices. The swift and steep rise in Treasury yields has weighed heavily on equities as investors mull the possibility that interest rates will remain at current levels for some time longer than had previously been hoped.

Today’s Federal Reserve announcement is all but a done deal on interest rates remaining unchanged and indeed now having peaked. Accompanying comments will inevitably be scrutinised for the Fed’s latest thinking on where to move from here, and with the US economy still showing few signs of weakening, the case remains for a tight monetary environment to prevail for the time being.

Also overhanging sentiment is an expected Treasury announcement today on financing plans, which could reveal a raft of further bond issuance in the final quarter to fund a growing budget deficit. In turn, this could drive yields higher, further impacting equities, although the latest estimates of how much borrowing is required has been lowered by the Treasury, easing some of the pressure which had been building up.

• Why US shares are attractive plus an outlook for 2024
• The four stocks with yields above 8% about to pay dividends
• Stockwatch: why this share is back on my radar

The third-quarter earnings season is now well over halfway complete, with an estimated 80% of companies having beaten estimates so far and with earnings growth of 5% for the S&P500 still on track. This also comes with some caveats, however, with an increasing theme coming from boardrooms that increasing energy prices, sticky core inflation and conflicts in the Ukraine and Middle East are weighing on prospects.

In the meantime, the performance of the indices has been crimped, and in the year to date the Dow Jones is now down by 0.3%, with the S&P500 and Nasdaq having added 9.2% and 23% respectively.

A slightly brighter Wall Street session spilled over into Asian trading overnight, although the optimism was diluted by the time it reached UK shores. The premier index had a cautiously positive start, with strength in Next after its latest profit upgrade reading across to the likes of Marks & Spencer Group (LSE:MKS), while Smurfit Kappa Group (LSE:SKG)’s trading statement pleased on improving demand.

Conversely, Weir Group (LSE:WEIR) and Segro (LSE:SGRO) stumbled on a weak trading update and a broker downgrade respectively. Despite the brisk opening the FTSE100 remains down by 1.5% in the year to date, while the FTSE250 continues to drift mostly lower and is now nursing a loss of 9.3% so far this year.