Next shares rocket after double surprise

The fashion chain loves to underpromise and overdeliver. This sensible strategy has triggered another share price rally after these Q2 results.

Next (LSE:NXT) is a past master at underpromising and overdelivering, and this unexpected update plus profit upgrade has again confounded the market.

The upgrade takes the expected full-year pre-tax profit number to £750 million from a previous £720 million and, equally importantly, to 3% above pre-pandemic levels.

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Full price sales are the star of the show at present, obviating the need for reduced price tags. Over Next's second quarter, the increase of 18.6% overall compared to 2019 is materially ahead of the group’s previous guidance of a 3% rise, and, as a consequence, the expected full-year number has been doubled to 6%.

At the same time, Next’s careful financial management is resulting in an ongoing reduction of net debt which, along with the profit upgrade, will result in an expected cash surplus of £240 million, which in turn will enable the payment of a special dividend in September, with every likelihood of a further payment in January.

Online success has again underpinned progress, with an increase of 56% to full-price sales for the first half as a whole, compared to 2019, contributing to an overall increase of 7.8%. Next remains understandably cautious as to whether this particular rate of growth can be maintained for the rest of the year, having cited some explanations for the outperformance on conditions which may fade, such as the release of pent-up demand, warm weather and a lack of foreign travel boosting domestic spending generally.

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Even prior to today’s strongly positive reaction to the update the shares had risen by 46% over the last year, as compared to a hike of 9.7% for the wider FTSE100 index. Perhaps the other surprise that comes with the stock is that despite its progress over recent years, Next has remained stuck at just a 'hold' in terms of market consensus view, albeit a strong one.