Next posts 7.1 percent rise in H1 profit, maintains FY15 guidance

Thursday, 10 September 2015

REPORT Total Next Group sales franchise sales were up 2.7 percent. Profit before tax was up 7.1 percent and earnings per share (EPS) were up 8 percent, boosted by share buybacks last year. The company has declared an interim dividend of 53p, an increase of 6 percent.

Full price Next Brand sales for the first half of the year ending July 2015, were up 3.5 percent. Lower markdown sales meant that total Next Brand sales were up 3.3 percent. Total retail sales were up 0.2 percent and full price sales were up 0.8 percent, while net new space contributed 2.2 percent to growth. The company expects retail net margins for the second half to be broadly in line with last year.

Retail expansion on cards for the full year

The addition of profitable new locations, the relocation and expansion of successful stores and the closure of underperforming stores remain central to the development of Next’s retail business. The company aims to increase net trading space by 293,000 sq. ft. this year. Looking beyond the current year, it estimates to add around 350,000 sq. ft. of net trading space in both 2016 and 2017.

Profitability of stores opened in the last 12 months is forecast to average 24 percent and payback on the net capital invested is expected to be 18 months. Both figures meet company investment hurdles of 15 percent store profitability and 24 months capital payback.

Directory sales witness growth

Total Next Directory sales grew by 8.2 percent in the first half, with full price sales growing 7.5 percent. Profit grew by 7 percent. The company expects that Directory margins for the full year will be broadly in line with last year.

Over the course of the last three years the nature of the Next Directory business has slowly changed. As it matures in the UK, growth in sales has increasingly come from two new sources. In the UK, Label's third party branded sales contributed more to growth than the Next brand; outside the UK, its online overseas business is now large enough to make a meaningful contribution to growth. For the full year, Next expects Label full price sales to be up 20 percent, lower than its initial plan of 30 percent rise.

The company’s franchise partners operate 181 stores in 35 countries, which is similar to last year. Franchise sales in the first half have reduced by 8 percent, mainly due to adverse currency movements and difficult trading conditions in some territories. It owns 14 stores in Europe which have broadly managed to break even. The company is budgeting for international retail to make 11 million pounds (16.8 million dollars) profit for the full year.

Wage hike not to impact sales

In July the Government announced the introduction of the Living Wage Premium (LWP) which sets a new minimum wage for employees who are twenty five years old and above. The LWP has been set at 7.20 pounds (11.06 dollars) from April 2016, which is 55 percent of the forecast 2016 median wage.

The company says that from a retailer's perspective, general wage inflation is not such a worry, as long as wages are rising in real terms but if the price rises required to cover additional overheads then it could be passed on to consumers without adversely impacting sales. The logic is that if its customers' wages are rising much faster than its product prices, they are unlikely to reduce the amount of clothing they purchase.

Next's total UK wages, at circa 600 million pounds (921.4 million dollars), represent 15 percent of its sales. Of these, about 100 million pounds (153.5 million dollars) relates to those who would qualify for the LWP. The company states that since its adult starter rate will already be 7.04 pounds (10.81 dollars), the increase to 7.20 pounds (11.06 dollars) in 2016 is manageable. It estimates that the cost of implementing the LWP next year will be 2 million pounds (3 million dollars).

Maintains full-year sales guidance

Next has maintained the sales guidance for the full year issued with its trading statement at the end of July. Next Brand full price sales for the full year are expected to be up between 3.5 percent to 6 percent, which implies that sales in the second half will be up between 3.5 percent to 7.5 percent. Its next statement will cover the thirteen weeks to October 24, 2015 and is scheduled for October 28, 2015.

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