Next Increases Guidance As Sales Improve

Next PLC has published a trading statement covering the first half of its financial year. 

Sales in the first half of the year have been dominated by a sharp reversal of last year's lockdown trends. Sales in Retail stores recovered, while Online growth appears to have reverted back to its longer term trajectory. Many product trends have also returned to pre-pandemic norms. Lockdown winners such as Home and sportswear retreated, while formalwear returned to favour. As anticipated, Online returns rates and surplus stock also reverted to pre-lockdown levels.

HEADLINES

• Q2 full price sales1 up +5.0%2 versus last year, £50m ahead of our previous guidance.
• Full price sales guidance for the second half maintained at +1.0%.
• Full year profit guidance increased by +£10m to £860m (+4.5% versus last year).
• Earnings Per Share (EPS) guidance increased to +7.2% versus last year.

1 Full price sales are total sales excluding VAT, less items sold in our Sale events, Clearance operations and Total Platform.

2 Full price sales against last year, excluding Russia and Ukraine, were up +6.3%.

FULL PRICE SALES PERFORMANCE
Full price sales in the quarter were +4.7% stronger than we expected. In part, we believe this over-performance has been the result of unusually warm and dry weather in June and July. A marked return to formal dressing, perhaps driven by pent up demand for social events (weddings etc.), has also played to the strengths of the NEXT brand.

RETAIL AND ONLINE SALES TRENDS
At first sight, our full price sales performance against last year suggests that (1) growth Online has ground to a halt and that (2) Retail is having something of a renaissance. This is certainly the case on a one year basis. But we think that these changes reflect a short term reversal of pandemic trends, and are unlikely to be indicative of longer term trends in consumer behaviour.

Last year, our stores were closed for most of the first quarter. Even when they reopened we believe that many customers remained wary of visiting shops. During this time we think Online shopping was inflated by at least as much as Retail sales were depressed. 

QUARTERLY SALES BY BUSINESS
A more detailed breakdown of our sales performance by business division is given in the tables below for the first and second quarter. The first table shows the comparison against last year and the second against three years ago.

A RESURGENCE IN RETAIL?
During Q2, Retail's full price sales performance has been much better than we had anticipated and up (+4.7%) against three years ago. We had planned that our stores would be down against 2019, following the long run of negative like-for-like retail sales we have experienced since 2016.

We suspect that the apparent improvement in the fortunes of our stores is, to some extent, down to the number of competing stores that have closed in the last three years. This is supported by ONS industry statistics3 for February to June which suggest that the total money spent on clothing in all UK retail stores is down -6% compared to three years ago.

3 Two ONS datasets are used: (1) total retail spend on clothing in the UK and (2) the percentage of sales achieved online. Combining these two provides the total spend in physical shops. Data sources: (1) Retail sales pound data VaINSAT, 22 July 2022 and (2) Retail Sales Index internet sales ISCPNSA3, 22 July 2022.

LONGER TERM ONLINE GROWTH RATES
In the first half, the CAGR of our Online business over the last three years is very similar to the CAGR experienced in the three year period pre-COVID, as shown in the table below. Of course, these numbers do not imply Online sales will continue to grow at +13.4%, but they do demonstrate that our current Online sales growth is not as unusual as it first appears. 

ONLINE RETURNS RATES - BACK TO PRE-COVID LEVELS
As anticipated, returns rates have reverted and are currently close to pre-pandemic levels at 42%. This follows two years of exceptionally low returns rates during the pandemic. The low returns rates during the pandemic were mainly driven by product mix, with sales of low returning categories such as Home, childrenswear and sportswear far exceeding their normal levels. 

END OF SEASON SALE

STOCK GOING INTO THE SALE
Last year, our stock for Sale was exceptionally low mainly as a result of industry wide stock shortages. So this year Sale stock was +30% up on last year. However, against three years ago, Sale stock grew by +25%, broadly in line with the growth in full price sales over that period (as set out in the table below). Once again, it is last year's figure which is unusual, with this year's surplus returning to more normal levels. 

Clearance Rates
To date, our clearance rates have been below our expectations. As mentioned earlier, warmer weather has been very helpful for full price sales during the quarter. However, the particularly hot weather experienced on the first two days of our Sale encouraged customers to stay away from shops and particularly hampered clearance of heavier weight products. The additional cost of the lower clearance rates is reflected in our revised central profit guidance and has been more than offset by the benefit of better full price sales.

NEXT FINANCE
We expect NEXT Finance profit to be in line with the guidance of £160m previously issued in March and for our customer receivables balance to close the year at £1.28bn, which would be up +10% versus last year and ahead of pre-COVID levels. As set out in the table below, defaults show a marginal deterioration against last year but are still materially better than pre-COVID levels.

GUIDANCE FOR FULL PRICE SALES, PROFIT AND EPS

NEW CENTRAL GUIDANCE
The £10m increase in our central guidance for profit before tax is explained in the table below. £15m of additional profit has come from better than expected full price sales in the first half. Retail sales were a larger percentage of our total full price sales in the quarter, which improved margin by +£6m, and we are expecting a similar gain in the second half. These increases have been partially offset by additional costs as set out in the table below.

GUIDANCE RANGE

The stronger than expected sales performance in Q2 is not expected to continue into the second half and we are maintaining our sales guidance for the remainder of the year at +1%. Our caution stems from two factors, we believe that: (1) an unusually warm summer boosted sales in the first half and we do not expect a similar weather windfall in the second half; and (2) the impact of inflation on consumer spending is likely to worsen in the second half. Our latest full price sales and profit guidance ranges for the full year are set out in the table below.

SHARE BUYBACKS
So far, in this financial year, we have spent £224m on share buybacks at an average price paid per share of £63.85, which equates to 3.5m shares. This reduces the number of shares in issue by 2.6%. If profits are in line with our guidance of £860m, then the Equivalent Rate of Return4 (ERR) on these buybacks will be 10.6%.

4 Equivalent rate of return (ERR) is calculated by dividing the anticipated pre-tax profits by the market capitalisation at the start of the financial year (January 2022). NB - Market capitalisation is calculated based on the shares in circulation, so excludes shares in the NEXT Employee Share Option Trust.

INTERIM RESULTS
We are scheduled to announce our results for the first half of the year on Thursday 29 September 2022.

Source : NEXT PLC

For all the very latest news and intelligence on the UK's largest home improvement and garden retailers, sign up for the Insight DIY weekly newsletter.