Next share price sinks as profits peak

Next delivers record profit

Fashion and homeware retailer Next reported a 8.4% rise in sales to £5.15 billion in the year to the end of January 2023, accompanied with a 5.7% jump in pretax profits to a new all-time record of £870.4 million.

That was ahead of the £5.12 billion of sales and the £860.2 million of profits forecast by analysts.

Have growth and profits peaked at Next?

However, it appears growth and profits have peaked.

Next has warned full price sales will fall around 1.5% this year and profits are set to drop 7.6% to £795 million. That is all the more disappointing considering analysts had hoped for profits of £806.2 million.

‘The year ahead looks like it will be challenging: the combination of inflation in our cost base and top line sales which are likely to edge backwards is uncomfortable,’ said Next in a statement.

The company said the second half will be better than the first, which will come up against tougher comparatives from the year before because unusually warm summer weather coincided with the release of pent-up demand for summer events after the pandemic. Specifically, Next said full price sales will be down 3% in the first half and 0.2% lower in the second.

Next is aiming to deliver £68 million of cost savings this year but this will not be enough to counter a £116 million rise in costs as inflationary pressures continue to push up energy, wages and investment.

Higher costs and lower sales will ultimately eat into its bottom-line.

Will Next upgrade its outlook?

Next tends to low-ball its initial view and then upgrade it as it gains more clarity on what lies ahead, although it said in January that that this may not be the case for the year ahead after warning it is ‘concerned some might look at our forecast for 2023 and again assume we are being over cautious’.

Still, Next’s reputation for under-promising and over-delivering and the fact it generated £5 million in extra profit in January alone could keep hopes alive that the outlook will be upgraded. That extra profit came from clearing its end-of-season styles and better than anticipated margins. Next has won applause for how it has managed inventory, which has so far helped protect profitability.

Next also said that selling price inflation will ease more than originally expected this year. Like-for-like price inflation is forecast to rise 7% in the spring and summer, down from its previous expectation of 8%, and rise about 3% in the autumn and winter, just half the previous forecast of 6%. It said this is improving faster than anticipated because of a significant reduction in freight costs and better factory gate prices.

‘Looking through next year to the longer term our prospects feel more positive than they have done for some me. The burdens of the structural change to our industry appear to have eased, our Retail business is a much smaller percentage of the group than it was eight years ago, and its rent and rates bill is slowly adjusting to reflect current levels of retail demand,’ said the company.

Where next for the Next share price?

Next shares are still trading well below where they sat before the pandemic, despite the fact sales and profits remain well above 2019 levels. That has been behind Next shares rallying over 50% since bottoming-out almost six months ago. The rally has lost some steam and faced more resistance since shares hit their highest level in over a year around two weeks ago.

News that profits have peaked sent the stock down its lowest level in almost three months this morning, with shares currently down over 5%.

The stock is testing 6,400p, which has emerged as peaks and troughs on several occasions over the past 11 months. This, or possibly the 100-day moving average at 6,324p, should provide some support today. Any more pressure risks pushing it toward the 200-day moving average or a move toward the 5,900p level of resistance we saw in early December.

If it can recapture 6,400p, then the immediate job is to close today’s gap by recapturing 6,654p and then the 50-day moving average.

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