Next’s latest update didn’t disappoint
City Index March 20, 2014 8:34 PM
<p>UK-based retailer, Next, boasted strong performance with the company’s market update today (20th March). The company reported a 5.4% rise in total revenue at £3.7bn […]</p>
UK-based retailer, Next, boasted strong performance with the company’s market update today (20th March).
The company reported a 5.4% rise in total revenue at £3.7bn for year ended January 2014. Pre-tax profit came in at £695m – that’s an 11.8% increase over the prior year.
The numbers were certainly consistent – with the company’s recent upward revision of its pre-tax profit guidance to between £684m and £700m.
And that’s thanks - in part – to having established a decent online presence.
Indeed, the company attributed its strong performance over the Christmas period partly to its online and catalogue business (Next Directory) which, according to the company, got a boost due to increased consumer confidence in its online deliveries.
That helped drive sales right up to the weekend before Christmas.
The proof is there to be seen.
By segment, Next Directory certainly stood out, boasting a 12.4% increase in sales at £1.3bn and an 18.7% operating profit rise at £358m.
All that means is that, for the first time, Next Directory’s profit has overtaken the company’s core retail stores business (Next Retail). Next Retail posted just near 2% growth in revenue and a 5% rise in operating profit at £2.2bn and £348m respectively.
Looking ahead, while the company is relatively cautious, it’s forecasting overall revenue growth of between 4% and 8%, and pre-tax growth of between 5% and 11%.
That contrasts markedly to competitor Debenhams, for instance, which issued another profit warning in January as aggressive pricing over the Christmas period took its toll on margins.
Given the popularity in online shopping, Debenhams’ less established online service is arguably a contributing factor to its current problems. For context, the company’s online sales make up 13% of total sales (as at August last year) versus Next’s 36%.
Auxiliary services such as free next-day delivery to stores on orders placed before a certain time of the day, have of course helped Next Directory.
Next’s financial health remains strong
Next’s net debt at the end of its fiscal year stood at £512m, which works out to around 0.6x net debt to EBITDA.
That’s low by historical standards and compared to some peers: Debenhams (1.5x last twelve months’ EBITDA), Marks & Spencer (2x last twelve months’ EBITDA).
The company looks to be keeping a relatively tight rein on its debt, having guided a net debt range of between £500m and £750m for the coming year.
Of course, Next’s superior valuation over its aforementioned rivals more than reflects its good competitive position.
But it’s not even close to online-only competitors. Earlier this week, the company’s shares dipped on the back of less-than-expected growth figures from online-only fashion retailer, ASOS. If that tells us anything, it’s that Next has emerged as a somewhat notable online player in the eyes of investors.
Now, that was not to say that the company’s valuation of around 18x P/E is likely to ascend up to ASOS, which sports a forward P/E of more than 90x.
But, in the absence of any adverse event affecting the sector, and given that signs point towards the company continuing to deliver, it’s reasonable to think that its valuation should do the same, long term.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.