Next upgrades annual profit forecast as Q2 sales beat expectations

Retailer Next upgraded its annual profit expectations on Wednesday as it reported a smaller-than-expected decline in full-price second-quarter sales, beating its own expectations and performing ahead of the best-case scenario given in its April trading statement.

Full-price sales fell 28% in the second quarter, following a 38% slump in the first. Next said total sales in Q2 - which include markdown and clearance sales - also fell 28%.

The group now expects full-year pre-tax profit to be around £195m, while year-end net debt is forecast to reduce by approximately £460m. It had previously said that its best case scenario would be for profit of £150m, while its worst case scenario would be no profit at all.

As expected amid the Covid lockdown, sales of childrenswear, home, nightwear and sportswear, along with some adult casual clothing did much better than the more formal parts of its clothing ranges associated with work, going out, overseas holidays and large social events.

Next said warehouse capacity has come back faster than it had planned and store sales have been more robust than expected. As a result, second-quarter sales have been "significantly ahead" of its internal plan.

Online sales in the second quarter were up 9%, having fallen 32% in the first, while like-for-like sales in retail stores since reopening were down 32%.

"The company is in a much better position than we anticipated three months ago: consumer demand has held up better than expected and our online warehouses have achieved much higher capacities than we thought possible. Costs have been well controlled, and we have taken steps to ensure that our balance sheet is secure," it said.

At 1340 BST, the shares were up 7.5% at 5,654p.

Russ Mould, investment director at AJ Bell, said: "It’s a pleasant surprise to see Next beat its best expectations for trading and this is testament to its strong qualities as a business.

"A cynic might suggest that it was too pessimistic in its scenario planning back in April, just like many other companies which have set the bar very low for their second quarter earnings period. Whether that’s true or not, arguably the new guidance for earnings is given on a stronger footing. Next has now had enough time to see how the retail sector will operate under the new social distancing regime.

"It must fine-tune operations to make them more efficient in this new world, as well as find ways to get people to keep buying its products which may not be straightforward given the likelihood of rising unemployment."