Next’s trading update on Wednesday showed the UK fashion, home and beauty retailer continuing to prosper in a tough environment. The company said that in the 13 weeks to 25 October, Next full-price sales were up 10.5% year on year, £76 million ahead of its guidance of a 4.5% rise. It didn’t give a monetary figure for sales in Q3, although it did say that full-year sales will be over £5 billion.

Sales “over-performed” in both its core UK and overseas markets although at 5.4%, the UK sales growth was below what it had managed in the first half. That said, it easily beat its own guidance of a 1.9% rise.

Overseas sales soared, albeit non-UK sales are much smaller and have more potential for explosive growth. But there’s no denying that a 38.8% jump easily outstripped growth achieved in the first half, and was way ahead of its guidance of 19.4%.

The company is notoriously cautious when it comes to sales guidance but its performance so far this year appears to have encouraged it to be a bit bolder and it’s increasing its guidance for full-price sales in Q4 from a rise of 4.5% to one of 7%. If achieved, this would add a further £36 million worth of full-price sales to its forecast.

It’s also increasing its full year guidance for pre-tax profit by £30 million to a total of £1.135 billion.

Digging deeper

Looking further at the details of its sales in its most recent financial periods, it said Q3 full-price sales for the the Next brand in its UK Online division were up 4.2%, and with the 6.8% growth of the first half that means the year to date has seen sales here rising 5.8%.

In its Online Label division, Q3 sales rose 7.8% and when combined with the 9.2% increase of the first half that makes an 8.7% rise for the year to date.

In the Retail division (that is, the company’s own stores) Q3 sales increased 2%, lower than the 5.4% of the first half but adding up to a 4.3% total for the year so far.

That all produces the aforementioned 5.4% increase for the quarter in the UK that came after a 7.6% rise in the first half and adding up to a 6.8% rise for the year to date.

The 38.8% increase in Online International sales came after a 28.1% first-half rise and means the year to date has seen 31.5% growth.

The company also said that total full-price product sales in the third quarter rose 11.2%, just short of the 11.6% rise of the first half and adding up to an 11.5% increase for the first nine months of the year.

Why so strong?

So let’s look at the explanation behind those numbers. As expected, sales growth in the UK weakened in comparison to the exceptional performance achieved in H1 because the first half has benefitted from favourable weather conditions and “competitor disruption” (the M&S cyberattack that kept its e-store offline for a long period).  

In hindsight, Next said it “underestimated the positive effect of improved stock levels this year” after last year’s stock deliveries were delayed by disruption in Bangladesh and constraints in global freight capacity.

And that international jump came as growth through its direct websites was better than expected because it was “able to spend more on profitable digital marketing than anticipated”.  Marketing spend in Q3 was up 50% against expectations of +25%. The spending increase “was driven by the strength of the returns we were able to achieve. Our marketing budget is an estimate, not a fixed sum. As long as returns remain above our hurdle rate, we will continue to carefully increase our investment”.

As for sales through international third-party aggregators it said sales in Europe also benefitted from the consolidation of its stockholding there. Until Q3 this year, warehousing for its direct websites was separate from warehouses serving Zalando, its largest aggregation partner. As a result of merging these activities into one warehousing operation and one stockholding, stock availability for its business on Zalando has been “significantly improved”. The new operation is managed by Zalando’s third-party logistics division ZEOS.

What does this all mean for Q4? We’ve already seen that Next has upgraded its guidance for the final quarter of the financial year. Looking into that in more detail, it expects UK sales growth to continue to moderate, slowing from 5.4% in Q3, to 4.1% in Q4.

Last year, sales growth overseas “stepped forward dramatically from Q3 to Q4”. As it annualises this step change, it expects sales growth overseas to moderate from 39% to 24%.

Next full-price sales should be £5.552 billion for the entire year, up 9.7%, compared to earlier guidance of a 7.5% rise. Total group sales including markdowns and investments should increase 8.7% to £6.87 billion compared to earlier guidance of 6.3%. We’ve already mentioned the strong pre-tax profit number that the company expects and in percentage terms that should be an increase of 12.2% year on year compared to earlier expectations of a 9.3% jump.