HThere's no terribly sinister way to look at Next's progress towards an annual profit of £1 billion this year: the retailer already made profits of nearly £500 million (£498 million) in 2008, so it's not extraordinary that it has simply doubled in 17 years – a compound annual growth rate of just 4%.
But that view is patently absurd for at least two reasons. First, Next, like every other company, had to deal with a long recession following the financial crisis and then the global pandemic. The retail industry was littered with the carcasses of companies that just couldn't make it: BHS, Debenhams, etc. Or consider the difference with Marks & Spencer, which hit the £1 billion mark in 2008 and hasn't made it since. Even if M&S is in recovery mode, Next is a much bigger company today in terms of stock market value, with £13 billion taking over £7.5 billion.
But the second reason is more important for shareholders: Next's earnings per share growth is the real value driver for shareholders, and it has significantly outpaced its profit growth. Welcome to the wonderful world of share buybacks. If you buy back a little bit of stock each year, the effects can be dramatic if, like Next, you can generate enough cash to invest in the business to keep the profit wheels turning.
In 2008, Next had just bought back 26 million shares (11.5% of the shares issued at the time) for £513 million in cash, according to that year's annual report. This brought the number of shares in issue to 201 million. Today, as the buyback continues, that total has fallen to 126 million. Obviously, earnings per share have increased dramatically, as profits have doubled despite the massive reduction in shares in issue.
Or, as the chart accompanying Thursday's half-year results shows, you can go back to 1997 and look at the impact on earnings per share if shareholders also reinvested their dividends. The answer is that it had a compound growth rate of 17.5% for about 20 years, followed by 8.2% for the next seven years – a long period of fantastic profits followed by a period of mediocrity.
The latter led shareholders to worry that Next was running out of room to grow in the UK, despite having moved online early on. Chief executive Simon Wolfson said the formula stopped working around 2017: “The dramatic shift to online shopping started to eat into store revenues.”
But therein lies the significance of his assertion that the game will shift again, and 2024 “feels like the beginning of a new phase.” He mentions the possibility of selling Next clothing overseas, developing new brands, and running websites for third-party brands. Naturally, his optimism is veiled with the usual caution that it's still early days, but he clearly feels Next is on the cusp of achieving something big. A quarter of online sales, for example, are already from overseas markets.
The only downside might be that with a share price of £104 (vs. £12.50 at the start of 2008), Next is already anticipating acceleration. So Next may get less return on share buybacks, even if the financial calculations (Wolfson has its own formula) still hold. But the dawn of a new era of faster profit growth from overseas and “platform” businesses would certainly be significant. History shows, firstly, that such trends can continue for a long time, and secondly, that Next is very good at translating profits into real value.
