Next Shares Surge 8% As It Hikes Profits Forecasts On Strong Christmas Trading

Next’s share price has leapt almost 8% on Thursday as better-than-expected Christmas trading prompted it to raise profits forecasts.

At £66.66 per share the FTSE 100 retailer rose to its most expensive for five months earlier in the session. It has since settled back to trade at £65.60.

Next said that full-price sales rose 4.8% during the nine weeks to December, much better than a predicted 2% fall. Sales were £66 million higher than the company had expected.

Its strong end to the year has encouraged Next to reinstate its former pre-tax profit forecast of £860 million for the full year to January 2023. This would represent a 4.5% year on year increase.

The retailer cut its forecast to £840 million back in September due to weak August trading and fears of a worsening cost-of-living crisis.

Store and Online Sales Rise

Full-price sales across its online operations rose 0.2% during the nine weeks to December 30, Next said. Meanwhile comparable revenues from its shops leapt 12.5% year on year.

Sales from its stores and in cyberspace both beat the company’s expectations, it said.

The FTSE 100 firm explained that it may have underestimated the negative effect Covid-19 was having on shop visits a year earlier. It may also have miscalculated the effect that improved stock levels had on its internet and physical operations.

Next suffered from “exceptionally low” stock levels in the same 2021 period due to supply chain disruptions.

Exercising Caution

Despite recent solid trading Next said that it remains “cautious” looking ahead to the new financial year. It predicted that full-price sales will likely fall 1.5% year on year, while pre-tax profits would probably drop 7.6% to £795 million.

The retailer said that price inflation for essential goods like energy would sap customer demand in financial 2024. Moreover, it forecast that rising mortgage costs would hit sales as homeowners’ fixed rates expire, as would higher price tags on its own products.

Next said that a devaluation of the British pound against the US dollar next year would chiefly drive price inflation across its ranges. Around 80% of the company’s contracts are negotiated in dollars.

On The Bright Side…

However, Next added that “we expect employment to remain strong so are not anticipating a collapse in demand or any increase in bad debt over and above our current provisions.”

The business said it expects price inflation on like-for-like goods to hit 8% in the Spring/Summer season before dropping to 6% in the second half.

Next said that it believes “cost pressures are now easing through a combination of reducing freight costs and lower factory gate (dollar) prices.” It said that falling commodity prices, improving factory production and new sources of supply would help reduce factory costs.

“Real Pain to Come”

Mark Crouch, analyst at social investing network eToro, said that “given the economic backdrop, Next’s Christmas trading statement will be a pleasant surprise for shareholders.”

But he noted that “a forecasted drop in both sales and profit for the coming year suggest the retailer expects the real pain to come in 2023.”

Crouch added that “the balancing act for Next will be to keep its prices competitive enough at a time when shoppers are being hit with above-average inflation and higher mortgage costs.”