Next: retailer’s attempt to size up is stymied by rising costs

Higher than expected annual profits sound like a good excuse for a shopping spree. In the UK retail sector, however, purse strings are tightening.

Over the past eight years, UK fashion retailers such as Next have adapted to the shift to online sales and dealt with pandemic lockdowns. The cost of living crisis adds to their woes. 

Strong full-year results are therefore overshadowed by concerns about whether Next’s growth has peaked. There are several signs the business has reached maturity.

The share price fell on Wednesday as longstanding chief executive Lord Simon Wolfson warned that inflation would drive a near 9 per cent drop in pre-tax profits this year to £795mn Labour costs are the biggest contributor. Full-price sales are also expected to dip 1.5 per cent as consumers tighten their belts. 

Given the profits guidance was first issued in January, Wolfson could be forgiven if he felt Wednesday’s share price reaction was overdone. Yet Next’s long-term outlook invites caution.

In the past 20 years, Next has delivered a compound annual growth rate of 14.1 per cent in pre-tax earnings per share (assuming dividends are reinvested). More recently growth has been flattening out. Compound annual growth in EPS will be closer to 5.4 per cent over eight years if the profit forecast for 2023/24 is correct.

Wolfson has been trying out new tricks. In 2020, Next launched a “Total Platform” service as an online host for other retailers, for example. Yet many of these newer ventures remain immature. Total Platform accounted for £16mn out of a total pre-tax profit of £870mn in the year ending in January. 

Wolfson believes there may still be room for market share growth in the group’s core business. But he cautions that opportunities to expand are “less numerous than they were”.

Next trades at a higher multiple than peers such as Marks and Spencer and The Frasers Group at 13 times forward earnings versus 10.8 times and 9.20 times respectively. Its disciplined approach to discounting has allowed it to maintain enviable margins for high street retailers. Poorer growth prospects mean investors should still think twice before filling their baskets.