Next raises profit forecasts for the fifth time

“A fifth profit forecast upgrade for fiscal 2024 and guidance for a further increase to another record level in 2025 explains why Next’s shares are setting new record highs,” says AJ Bell investment director Russ Mould.

“Better-than-expected cash flow also means the firm can reduce debt and continue to return cash to shareholders via dividends and share buybacks.

“These figures are a further reminder, as if one were needed, that retailers can thrive, regardless of what the weather does, if they sell the right product at the right price point in the right format for the target customer base. Doing this correctly will improve stock turn and sell through, reduce the need to discount and in turn help profit margins and cash flow.

“Next seems to have the knack of getting this right and in this respect its key performance indicator (KPI) of growth in full-price sales is particularly helpful. A 5.7% increase in full-price sales in the nine weeks to 30 December, a period which covers most of the retailer’s fiscal fourth quarter, represents an unexpected acceleration on the 4% growth generated in the third quarter to the end of October (a figure which itself also beat expectations).

Source: Company accounts. Fiscal year to January

While many retailers have whinged about the British weather in 2023, the FTSE 100 firm has got on with the job and now raised guidance for both sales growth and profits on no fewer than five occasions in the past ten months.

Source: Company accounts

“The company now expects to generate pre-tax income in the twelve months to January 2024 of £905 million, a new all-time high. This may help to explain why the shares are reaching new peaks, too, especially as management expects further progress to £941 million in fiscal 2025 (including £19 million in brand amortisation costs, which will be excluded from headline profit forecasts and figures going forward).

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, management guidance for 2024E and 2025E. Fiscal year to January

“The decision to report future profits excluding brand amortisation is a little disappointing, as it means Next joins the legion of firms who will be offering non-statutory figures as the headline number to watch. Next does explain the reasons for the switch – not least that it feels the value of the brands it acquires will go up over time and not down, as implied by the amortisation charge – and it thankfully makes it clear there are no plans to use EBITDA, or earnings before interest, taxes, depreciation and amortisation as a key profit benchmark.

“Even allowing for this switch, there is a forecast profit upgrade for fiscal 2025 of some 1-2%, once brand amortisation costs are included, and the 2024 forecast does exclude what will be a £110 million exceptional, non-cash gain triggered by the purchase of an additional equity stake in Reiss from Warburg Pincus.

“The other pleasing facet of Next’s latest update is cash flow, which Lord Wolfson notes will now be £100 million higher than expected for the year which is about to end. This means net debt will be lower than previously forecast.

“Less debt means less risk and less risk can mean a higher share price, or at least that a higher multiple of earnings is applied to the stock, all other things being equal.

“The stronger cash flow gives Next additional financial flexibility. On the current trajectory, Lord Wolfson now believes the firm may not have to refinance a £250 million bond that is due for repayment in August 2025. This bond carries a coupon of 3.00%, so the company may have the option to avoid tapping the fixed income markets at what could be higher rates, given that the current Bank of England base rate is 5.25% (although financial markets currently expect that to be the peak).

“The additional cash flow also gives Next the chance to reward shareholders. For fiscal 2025 it now intends to pay £250 million in dividends and offer a further £275 million in share buybacks (compared to targets of £248 million in dividends and £219 million in buybacks in fiscal 2024). Next year’s £525 million total cash return represents 5.1% of the current £10.3 billion market capitalisation.”

Source: Company accounts, management guidance for 2024E and 2025E. Fiscal year to January

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