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Next upgraded its guidance once again on May 8 — the second upgrade since the start of the year, and the 11th over the past three years, according to retail platform AJ Bell.
Full-price sales rose by 11.4 per cent in the first quarter, compared with a forecast of 6.5 per cent. The retailer attributed this to warmer weather, which led to people buying more summer clothes. Some of these sales were likely to have been pulled forward from the current quarter, so the company left full-year sales guidance unchanged.
Whether this caution is deserved or a precursor to more upgrades remains to be seen but the market seems to veer towards the latter view. Next’s shares are up by about 27 per cent so far this year, bringing it above the limit at which it will carry on buying back shares.
When setting guidance for earnings per share earlier in the year, the company had assumed that it would buy back £316mn of shares. Although it has already completed £81mn of purchases, Next only buys back shares when it can achieve an 8 per cent rate of return.
Based on current profit forecasts, this limits purchases to a ceiling of 11,600p per share — below the current level of 12,100p.
So are the shares overpriced? Sell-side analysts are certainly less bullish than they were — albeit purely on valuation grounds. Peel Hunt cut its rating on the shares to hold from buy and HSBC’s analysts argued that on a price/earnings ratio of 18, Next’s shares trade at a 25-30 per cent premium to peers.
Whether this is justified remains to be seen, but at their current level even chief executive Lord Wolfson has been tempted to cash in. He sold 100,000 shares on the day of Next’s upgrade for just shy of £12.4mn.