Industry experts say the Next fashion chain is in a better position than many to weather the tough economic conditions facing the high street.
With the Bank of England pushing interest rates up to 1.75 per cent, inflation expected to peak at 13 per cent, and fears that energy prices will push the economy into a five-quarter recession, the amount of cash families have to spend on things like clothes is falling.
But market analysts believe the fashion giant – which has its UK headquarters just outside Leicester – will weather the storm after a trading update showed it has performed well over the summer thanks to the unusually warm and dry weather and people spending more on formal clothes now that lockdown restrictions had lifted.
Despite a warning that the strong sales were expected to start slipping in the second half of the year, the business said profits for the full year should be ahead of expectations at around £860 million – 4.5 per cent up on last year.
Russ Mould, investment director at online stockbroker AJ Bell, said Next was widely seen as a “best-in-class” retailer and the latest figures showing why that was the case.
He said: “Bosses at Next are well-versed in how to operate successfully as a public company, demonstrating fluency in the art of expectation management.
“This helps explain how, right in the middle of the worst cost-of-living crisis in a generation, the company has been able to deliver better-than-expected numbers.
“Next has also benefited from market share gains as competitors like Topshop and Debenhams have disappeared from the high street.
“It seems the hot weather has been helpful too as it encourages shoppers to splash out on summer outfits, while a flood of weddings, after people were prevented from celebrating their nuptials properly during the pandemic, has also contributed to the robust trading.
“True to form, while it has lifted expectations modestly for the full year, Next is not getting carried away. There is no value for the company in letting exuberance about its resilient performance go too far.
“Next isn’t just playing a game here either, it is likely that things will get tougher before they get better.
“At least people can have some confidence that Next will do the best possible job of managing whatever challenges it faces and that it should do OK where other less durable competitors have fallen by the wayside.”
Charlie Huggins is head of equities at Wealth Club, which gives high net worth individuals and investors information on investment opportunities not typically available through mainstream stockbrokers or financial advisers. He also has shares in Next.
He said: “Next isn’t immune to the cocktail of headwinds facing UK retailers, but it tends to be better at managing them than most. These results are no exception.
“Everything Next does is forensically examined in terms of profit delivered, return on capital and risk. Investments are made with a 5-10-year view. The focus is on profit and cash, not EBITDA, or gaining market share. It doesn’t offer free delivery (outside of a subscription).
“By cutting its coat according to its cloth, Next earns operating margins of almost 20 per cent, far above that of most retailers.
“The key is a focus on incremental improvement. In any given year, these initiatives mean little. But when viewed over a longer time frame, the results are tangible.
“Next is no longer just a UK fashion retailer selling its own products. It’s broadened out into homewares and beauty and is selling more third-party brands through its website than ever before, both in the UK and internationally. This is helping to keep it relevant while opening new avenues for growth.
“Make no mistake – if the consumer catches a cold, Next will feel it. But it’s unlikely investors will lose their shirt, given the resilience of its business model. Meanwhile, the long-term growth prospects for the business are looking better than they have done for quite some time.”
