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By mid-morning today (29 October), the Next (LSE:NXT) share price was up 6% following publication of the group’s third-quarter trading update. And the retailer appears to be doing very well.
As has been a regular feature of its stock market announcements in recent years, it’s upgraded its full-year pre-tax earnings outlook. For 2025, it’s now expecting a profit before tax of £1.13bn, £30m more than previously anticipated.
The catalyst has been a strong sales performance. During the 13 weeks to 25 October, it reported a 10.5% year-on-year increase in its top line. Analysts were expecting a 4.5% improvement.
Surprise!
The group’s generating so much cash that it’s planning to pay (to be confirmed) a special dividend of around £3.10 a share in January 2026.
It’s also decided to stop buying its own shares, which are now changing hands for approximately £143 each. This could be a sign that the retailer believes its stock is now fairly priced. Judging by today’s reaction of investors, they could be wrong.
But the situation is a little more complicated than this. The group has a self-imposed limit of £121 a share and it must seek to achieve an 8% equivalent rate of return — calculated by dividing forecast pre-tax profit by its current market cap — on any purchase.
But with the group performing strongly, I question how it can keep growing. However, there appears to be a strong clue in today’s announcement. Compared to the same quarter in 2024, overseas sales were 38.8% higher. The group’s brand appears to be as well received internationally as it is in the UK.
This success is attributed to a 50% increase in spending on digital marketing and improved stock availability. And to the benefit of both companies, Next shares many of its warehouses in Europe with Zalando.
The group also claims that global entertainment platforms like Netflix and Instagram are giving an insight into how people in other countries are dressing. The internet makes it possible to order from the best retailers in the world without having to travel. And this cycle is self-perpetuating. As more people see others wearing internationally-sourced clothing they want to buy it.
Strong prospects
Next is an impressive business. It faces the same domestic challenges as other UK retailers – including higher National Insurance costs and a sluggish economy — but seems able to cope better than most. Importantly, the group’s managed to embrace the internet rather than see it as a threat. During the first half of the year, online sales of clothing, footwear and home furnishings accounted for 57.9% of total group revenue.
But excluding the special dividend, the stock’s offering a yield lower than the FTSE 100 average. And the fashion business is notoriously difficult. Consumer tastes can change rapidly and with plenty of competition there’s less brand loyalty than previously.
Its share price is up 45% since the start of the year, which could suggest its valuation is becoming stretched. However, largely because of its impressive track record of beating expectations and its international potential, I think Next shares are still worthy of consideration.