Next Steps: Profit Rises, But Can Sales Keep Up?

The stock market loves a winner—especially one that delivers two profit upgrades in a single year. But when that same company warns that its sales momentum might be a "pulled-forward" illusion, investors should sit up and take notice. That’s exactly what’s happening with UK retail giant Next PLC (LSE:NXT). Let’s dive into the details.

The Profit Pop: A Sunny Start

Next’s first-quarter results were a sun-soaked success. Full-price sales surged 11% year-on-year, blowing past its initial 6.5% forecast and adding £55 million in unexpected revenue. Warm weather fueled demand for summer clothing, with physical stores—often overlooked in the digital age—leading the charge. Online sales also thrived: UK e-commerce rose 8.9%, while international online sales skyrocketed 30%, proving Next’s global expansion is paying off.

The profit upside? £1.08 billion pretax, a 6.8% annual rise. That’s a £10 million upgrade from March’s already optimistic forecast. Post-tax earnings per share (EPS) jumped to 698.1p, a 9.7% leap over last year. Investors cheered: shares climbed 1.2% to 12,440p, hitting an intraday high of 12,545p.

The Cloud on the Horizon: Sales Caution

But here’s the catch: Next’s sales guidance for the full year remains unchanged at £6.6 billion. Why? The company warns that Q1’s outperformance might have “pulled forward” demand from Q2, leaving the second half vulnerable to two headwinds:
1. Tough Comparisons: The autumn/winter 2024 period was unusually strong, making growth harder to achieve later this year.
2. Economic Pressures: April’s National Insurance hike—a stealthy tax increase—is expected to bite as the year progresses, squeezing consumer wallets.

CEO Simon Wolfson summed it up: “We’re cautiously optimistic, but macro risks are real.” Translation? Don’t get complacent.

Why the Skepticism?

• Retail Slump Ahead? Next expects physical store sales to flatten for the rest of the year. Why? Weather-driven sales spikes are fleeting, and shoppers may retrench as economic pain sets in.
• Cost Headaches: Rising labor costs (due to higher wages and taxes) are offset by tech upgrades—like warehouse automation—and store staffing cuts. But a 1% price hike is also in the works to cover costs.
• Global Risks: U.S. tariffs and weak light vehicle production (a key retail category) add to uncertainty.

The Bulls’ Case: Resilience & Strategy

• Online Dominance: International online sales are booming, with Next expanding partnerships (Gap, Victoria’s Secret) and leveraging platforms like Zalando.
• Store Revival: After years of contraction, Next plans to open 10 new UK stores (net gain of 1 after closures). This signals confidence in bricks-and-mortar’s future—if done right.
• Cash Machine: With £1.07 billion profit last year (a record), Next has the cash to weather short-term storms.

Analyst Take: Buy, Hold, or Sell?

Analysts are split: 11 buys, 10 holds, and 1 sell. Bulls love the profit upside and online moats; bears worry about the UK’s economic slowdown and Next’s reliance on discretionary spending.

Verdict: A Buying Opportunity—or a Trap?

Here’s my take: Next’s profit boost is real, but its sales outlook is a warning flag. The stock’s recent rally might be overdone—unless the July sales update (covering the 26 weeks to July 26) delivers another surprise.

Investors should focus on two key questions:
1. Can Next’s online momentum and store strategy offset UK economic headwinds?
2. Will the autumn/winter 2025 sales period outperform the tough comparisons from last year?

If the answer is “yes,” this stock could soar. If not? Next might be stuck in neutral.

Final Call

Hold for now, but keep an eye on July’s update. The profit upside is undeniable, but the sales caution is a red flag. For aggressive investors, a small position could pay off—if Next’s resilience proves stronger than the gloom.

In a world where retail is a battlefield, Next is fighting smart—just don’t underestimate the storm clouds on the horizon.