Next hikes profit outlook as lockdown savings fuel higher sales
High street stalwart Next has agreed to repay part of the savings it made from a Covid business rates holiday after a better-than-expected sales performance.
Bosses at the fashion chain said profits will be ahead of expectations as sales topped pre-pandemic levels, with pent-up demand leading to customers restocking wardrobes that had not been updated since before coronavirus hit.
The £29 million in business rates being repaid covers the period when the company had stores open but was not charged the commercial property levy. Business rates are devolved in Scotland so there are likely to be consequentials as a result of the Barnett formula.
Pre-tax profits for the year are now expected to hit £750 million – an increase of £30m on previous expectations – after full-price sales in the 11 weeks to July 17 rose 18.6 per cent.
The group put the strong growth down to pent-up demand for adult clothing, with many customers having made few summer purchases during the last 18 months. Warm weather at the end of May and start of June also provided a lift.
Next said it believed the growth was also due to fewer people taking overseas holidays and spending their cash in the UK instead, while splashing out with money saved from the pandemic due to bars, restaurants and leisure activities being closed.
Despite the robust overall sales, business in Next’s physical stores remains subdued, with sales down 6 per cent in the 11 weeks to July 17 compared with the same period in 2019, prior to the pandemic.
But this was more than offset by stellar growth online – up 44 per cent over the same period compared with two years earlier.
The group’s online fashion label business – selling third-party brands – was the strongest subsection, up 65 per cent in the period, while its own-brand clothes sales jumped 28 per cent. Overseas sales were up 61 per cent.
As well as the taxpayer benefiting from Next partially repaying its business rates bill, the group revealed it plans to pay a special dividend to shareholders later this year.
A number of major retailers have agreed to hand back the savings made from the business rates holiday introduced to help firms amid the pandemic. In December, Tesco said it was repaying some £585m it had saved.
Eleonora Dani, an analyst at brokerage firm Shore Capital, said: “[Next] identified pent-up demand for adult clothing, warm weather, UK staycation and increased savings as the main drivers of the strong trading update.
“Interest income was down 9 per cent as consumers are paying down their balances faster and taking up less credit in general. Lower surplus stock also means margins are ahead of internal forecasts.
“The increase in profit guidance is unlikely to move consensus significantly but we expect at least a 1 per cent upgrade given that consensus [full-year profit before tax] was already at £742m (according to FactSet). Still, it should reassure investors that the business is back on track and set for the year’s second half.”