Next plc (LON:NXT) shares surged after the fashion retailer returned to quarterly sales growth and declared a third special dividend.
Shares gained 8.9% to 4,374p in afternoon trading.
In the 26 weeks to 29 July, full price sales edged up 0.7% as warmer weather during the period attracted customers to its summer collection.
This compared a 3% drop in first quarter sales when Next blamed the impact of rising inflation on consumer spending.
A weak start to the year meant sales in the first half year dropped 1.2% and the group expects the same level of decline in the second half as it remains “cautious” given the challenges it faces in the retail sector.
Next has been struggling to lift sales growth after the Brexit vote last June pushed the pound lower and raised import costs for retailers. Consumers have been tightening the purse strings and spending less on non-essential items such as clothing due to rising cost of living.
In its retail division, sales fell 7.4% in the second quarter and 7.7% in the first half. This was mitigated by robust sales in the catalogue shopping arm, Directory, with the second quarter up 11.4% and the first half up 7.4%.
At the end-of-season sale in July, the group had 5% less stock and markdown sales dropped 14%.
As a result, statutory total sales, including markdown sales, declined 2.1% in the second quarter and dipped 2.3% in the first half.
Next nudges up full year sales forecast
Following an improved second quarter, Next lifted its forecast or full year sales. It now expects a 3.0% decline to a 0.5% increase, compared to a previous estimate for a 3.5% drop to a 0.5% rise.
Next also declared a third special dividend of 45p, in line with its plans announced in the January trading statement. The group also expects to deliver £307mln of surplus cash this year, after estimating that to be £255mln in May.
“After making four quarterly special dividends, to the value of £257m, we will be left with surplus cash of around £50mln,” the company said. “It remains our policy to distribute surplus cash to shareholders through special dividends or share buybacks.”
Full year profit guidance unchanged
However, Next left its expectations for full year profit before tax unchanged at £680mlm to £740mln, which would reflect a 13.9% to 6.4% year-on-year decrease respectively.
Next said the growth in full price sales in the latest quarter was offset by lower clearance rates during its end-of-season sale and it expects a similar deterioration in its January sale.
The company said while it believes there was “some improvement” in product ranges and online functionality during the quarter, most of the increase was due to warmer weather and, to a lesser extent, lower markdown sales in the end-of-season sale.
As previously announced, Next also confirmed John Barton is stepping down as chairman with immediate effect. Grafton Group PLC’s (LON:GFTU) chairman Michael Roney is to replace Barton.
What analysts think
"Profit guidance is unchanged and it can cover the planned dividends with £50m to spare, which can either be used for more dividends or share buybacks,” said Neil Wilson, senior market analyst at ETX Capital.
“Either way, the market likes the results and the shares are flying. Fundamentally the business remains strongly cash generative even if it’s not expanding rapidly and is able to maintain solid returns to investors.”
George Salmon, equity analyst at Hargreaves Lansdown, said while the trading update from Next has been well-received by investors, the company is “still feeling the heat” as the UK retail sector remains under pressure.
He noted that much of the improvement was driven by hot weather in June and July and that year-on-year total sales growth is still in negative territory.
“Investors should be careful to remember that one swallow doesn’t make a summer, and Next hasn’t upgraded profit forecasts on the back of these numbers,” Salmon added. “Indeed, today’s jump in the share price has only taken the group back to where it was in May.”
Shore Capital left its rating at ‘hold’ and target price at 3,666p, saying “we take comfort in the improved trading outturn with respect to our recommendation change and believe the shares may experience a short-term rally on the back of today’s newsflow”.