Next shares rocket after Christmas profit surprise

Shares in the high street bellwether have responded well to its Christmas trading statement and are now up almost 50% since mid-October and at prices not seen since August. 

After a strong finish to the year Next (LSE:NXT) used this update for the nine weeks to 30 December to restore its previous pre-tax profit estimate, after a downgrade at September's half-year numbers which blighted the share price.

The increase in pre-tax profit guidance to £860 million from the previous £840 million would represent yearly growth of 4.5%, as opposed to the 2.1% which the lower figure assumed. This is largely due to an increase of 4.8% in full price sales in the final quarter, despite the effects of the sale and clearance events, and maintains the group’s reliance on avoiding discounting where possible.

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Retail stores in particular were a highlight in the latter part of the year, with full price sales rising by 12.5% in the fourth quarter due to improved stock levels, and the possibility of Next having underestimated the effect Covid had been having on store visits in the previous year. Online growth was more sedate, but with an additional contribution from finance interest income, which grew by 5.8%, the overall growth was a pleasing end to a challenging period.

In addition, the group is anticipating several factors which should benefit its numbers over the coming year, such as a decline in the price of key commodities such as cotton and polyester, new sources of and improvements to supply and reducing freight costs.

At the same time, however, further inflationary pressures, particularly in energy and product prices, as well as rising mortgage costs which put additional pressure on the consumer are likely to weigh. Even so, the outlook also notes that employment should remain strong, which should avoid any collapse in demand or an increase in bad debts above the provisions which the company has already made.

In the meantime, Next has anticipated that in addition to the payment of normal dividends, there is likely to be a cash surplus of £220 million which would feed through to share buybacks. The current dividend yield of 3.2% (turbocharged to 5.8% when including special dividends) should provide some additional attraction for investors looking at total return. 

It has long been observed that in general, Next updates err on the side of caution. As a result, more often than not, the company can then under-promise and over-deliver. In terms of its outlook for the next financial year, the group has remained true to form and is estimating full price sales declining by 1.5% and a pre-tax profit number of £795 million, which would represent a decline of 7.6% on this year’s number, and which will have taken some of the shine from this particular update.

The group is keen to point out, though, that the numbers in the current year have largely landed where Next had predicted last January, and is therefore maintaining that its guidance is realistic as opposed to overly cautious. Of course, this remains to be seen in the coming year, but in setting the bar low the group can keep something of a lid on market expectations.

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In terms of the share price, there has been something of a rally of late, but there is still much damage to repair. The shares have bounced by 21% over the last three months, but this is not enough to negate the performance over the last year, where the price has declined by 24%, as compared to a marginal gain of 0.9% for the wider FTSE100.

Indeed, over the last three years the shares are down by 12%, during which time the retail sector has had to deal with several major headwinds. The company remains well-regarded and tightly managed, and although the market consensus has recently slipped slightly to a 'strong hold', the initial spike in the share price in early exchanges could well foreshadow upgrades which would restore the generally positive view.