Next upgrade is part of positive cocktail in Q4

Next (LSE:NXT) has delivered another classic update following a stronger-than-expected Christmas showing.

In typical fashion, the group continues to exceed previous estimates, up its profit guidance for the year yet again while providing a cautious outlook for the year to come – a positive cocktail which investors have almost come to expect.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

Full-price sales growth of 6% for the period translates to underlying growth of 5.7%, comfortably ahead of the 3.5% which the group previously guided. Within this number, UK online sales grew by 3.8%, online Label UK by 9.2% and online overseas by 31.4%. The overseas number is particularly promising given the group’s growth aspirations to add to the success being seen domestically and sets the scene for a high-quality set of full-year results.

Indeed, the overseas offering is one which holds up some interesting prospects. The group believes that international tastes in clothing are beginning to converge, not least of which is due to the increasing visual power, appeal and presence not just of the internet, but also the rise of streaming services which are now increasingly used by younger audiences.

More recently, the group has leaned towards full-price sales at the expense of discounts, and the strategy has paid off with the company noting that there is an increasing proportion of customers who are buying fewer, but more expensive items, which potentially brings new opportunities for Next slightly higher up the price chain.

The financial health of the company is another focus on which progress has been made. Quite apart from the net debt figure having been reduced by a further £75 million to £625 million, the cash generative power of the company has enabled the delicately balanced shareholder return programme to continue.

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Another upgrade at Next as Mag7 results season gathers pace
• 10 hottest ISA shares, funds and trusts: week ended 3 January 2025

Based on its own calculation, Next estimates whether excess capital is best deployed through either share buybacks or dividends. At present, a dividend yield of 2.3% - which has not traditionally been one of the stock’s attractions – is set to grow marginally. By contrast, the total of share buybacks for this year is expected to reach £326 million, of which £302 million has already been completed.

Of equal importance, however, are the prospects for the group over the longer term as it continues to innovate, consolidate and grow its offering within a notoriously competitive environment. Against that backdrop, Next has provided a typically cautious outlook for the year, driven largely by the measures introduced in the Budget. The group will endure an additional £67 million of wage costs, which it intends to mitigate through a combination of cost savings and price increases of around 1% on its goods. More broadly, Next also expects that the consumer environment may suffer indirectly following the pressure levied on the retail sector.

Nonetheless, its guidance for the next financial year is upbeat if cautious, anticipating full-price sales growth of 3.5%, pre-tax profit of £1.046 billion which would represent an increase of 3.6% and earnings per share growth of 6.7%. In the absence of any acquisition opportunities arising, the group also expects to continue the share buyback programme to the tune of £314 million.

• Wild’s Winter Portfolios 2024: riskier portfolio outperforms Wall Street
• Insider: boss deals in Raspberry Pi shares
• Watch our video: the megatrend I'm following in 2025

The update has been warmly received by the market in early trade, in stark contrast to a weaker general opening across the primary index. The share price gain adds to the 13% rise over the last year, which compares to a hike of 7.3% for the wider FTSE100, and the 47% spike seen over the last two years.

Despite this appreciation, the shares remain undervalued on a historic basis, with perhaps the only surprise being the stock’s perennial inability to move away from a market consensus which remains stubbornly stuck at a hold, albeit a strong one. Based on past performance, it would appear that the naysayers who have doubted the company’s prospects may continue to do so at their peril.