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LONDON (Alliance News) - Fashion and homeware retailer Next PLC Thursday reported a strong 19% rise in pretax profit for the first half of the year, citing a range of factors including the improving UK economy and much better summer weather, but warned that a potential interest rate hike could make growth tougher for the retailer next year.
Next's pretax profit was GBP324.2 million in the six months to end-July, up from GBP271.8 million a year earlier, as revenue rose 10.3% to GBP1.85 billion, from GBP1.68 billion. The growth was driven by a 7.5% revenue increase in its stores and 16.2% growth in its directory business.
However, its shares were down 2.5% at 6,985.00 pence, making it the second worst-performing stock Thursday afternoon, after analysts said the results had slightly missed expectations due to weaker margins in the directory business.
Next said that while Directory growth was strong, margins were hit by higher levels of advertising, moving more stock for sale onto the web, as well as higher sales of less profitable products.
Investec analyst Alistair Davies said the pretax profit figure was GBP5 million below his expectations, and he thinks that's because more new directory customers were paying in cash rather than using credit, weighing on the margin.
Next admitted that most of its new customers in the UK are now choosing to pay on order with a debit/credit card, rather than using a Next Directory credit account.
Numis said management had told analysts that profit from the company's credit book is too high and Next is set to reduce the interest rate on credit accounts gradually, costing about GBP6 million for each percentage point cut. Next management said it will offset this in the medium term by developing the catalogues, changing the catalogue schedule, and growing the international catalogue business, according to Numis.
Next said its overall online and catalogue Directory business continues to grow at a faster pace than its retail stores, although for the first time in several years the retail business contributed more to the growth of the company than its UK directory business. Next is expanding its directory business overseas, and international sales almost doubled to GBP101 million in the first half, from GBP54 million a year earlier.
Next said its retail business had a strong first half, with margins helped by a lower number of price discounts.
In a statement, the retailer described the overall sales growth as its strongest for many years, citing its extended ranges, new store openings and the growth of its online business.
"However it is important for us to recognise that this performance is, in some part, down to external factors. An improving economy, low interest rates, increasing availability of credit, less general discounting on the high street and much better summer weather have, we believe, all contributed to an improvement in our sales performance. In addition, an improved housing market has helped our Home business," it added.
That has made it more cautious for next year's performance, because it will be facing tough comparatives and potentially higher UK interest rates.
Next Chief Executive Simon Wolfson told journalists that while the general UK economy is improving, the risk to the retailer is that a potential interest rate rise will moderate growth.
"We remain mindful that some of these factors are likely to be less favourable next year and this year's fine summer weather could present tough comparatives next year, when interest rates are also expected to rise," he said.
Next continues to gain traction and grow overseas. In the last six months, it has begun trading in 11 new markets, including Cyprus, Saudi Arabia and China.
Wolfson said that while China presents the most interesting opportunity overseas, regulations and getting the stock into the country are all part of the challenges it is facing.
"Because its a very big country I think people expect far more from it than it is actually likely to deliver in the short term, and logistically and administratively it is very difficult to get right."
Even so, the retailer said it is not looking to get a Chinese partner on board, something other retailers have done, to solve the logistic challenges.
"We would rather do it ourselves," said Wolfson, adding that the company will spend the next few years getting the logistics right, after which it will then start pushing for growth in the region.
"While the opening has gone well, we don't really expect it to make a meaningful contribution to the business for the next two or three years".
Going forward Next said its focuses will be on product and store improvements, growing the UK and overseas directory, as well as its recently launched standalone website called Label, which sells all the third party brands.
The retailer kept most of its full-year outlook unchanged having already raised it twice this year.
It kept its guidance that pretax profit will be between GBP775 million and GBP815 million in the current financial year as a whole, up between 11% and 17% on last year. It expects total brand sales to rise between 7% and 10%.
It slightly increased its earnings per share forecast, to growth of between 13% and 19%, compared with the 12% and 18% growth forecast it gave in July.
Next raised its interim dividend to 50.0 pence, from 26.0p, but said it wouldn't be paying any more special dividends for the time being. It expects to pay a total dividend of 150 pence this financial year, up 16.3% from last year.
Strong cash generation had enabled it to return GBP223 million to shareholders through three special 50p dividends, of which two were paid in the first half. A further GBP105 million has been returned through share buybacks.
"The company has now distributed our expected surplus cash flow for the current year. So we do not intend to pay a further special dividend this year. However, the company has the financial capacity to buy back further shares and it may do so if the share price were to fall below our upper price limit and we judged such purchases to be in shareholders' interests," it said.
By Rowena Harris-Doughty and Steve McGrath; rowenaharrisdoughty@alliancenews.com; stevemcgrath@alliancenews.com; @rharrisdoughty @stevemcgrath1
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