Following sky-high investor expectations, NEXT delivered better-than-expected first-half results and another profit upgrade, albeit with a more cautious outlook for the UK. The figures reinforce the international and online momentum highlighted in this morning’s update, but a closer look shows how heavily growth rests on marketing investment, owned brands and operating efficiencies as stores and the domestic NEXT brand lose ground.
The profit target looks achievable
NEXT, the British fashion, homeware and beauty retailer, reported a 10.5% increase in first-half profit before tax to £569 million as total sales rose 9% to £3.54 billion.
“NEXT continues to prove its strategy is bulletproof, moving from strength to strength with growth as it raises profit guidance yet again ahead of the Christmas season,” commented Julie Palmer, Managing Partner at BTG, on the latest results.
The retailer raised full-year group profit guidance by £12 million to £1.255 billion, citing a modest sales upgrade and further savings, mainly from warehousing.
Charles Allen, Senior Industry Analyst at Bloomberg Intelligence, added that the profit guidance continued to look “prudent”, given that only 6.7% profit growth was needed in the second half of the year to reach the new £1.255 billion target.
Growth is shifting beyond the UK NEXT brand
UK full-price sales increased 3.6%, with online sales growth of 7.4% offsetting a 1.7% decline across stores. International online sales advanced 23.9%, despite price increases in some markets as the conflict in the Middle East raised operating costs.
The brand mix proved important, with brands and licences owned by NEXT making up £84 million of the £203 million increase in full-price sales, while the NEXT brand contributed £63 million and £56 million came from third-party labels.
Wholly-owned brands and licences, which include brands such as Lipsy and Cath Kidston, grew 50% overall, including increases of 32% online in the UK and 82% overseas. Their online net margin reached 18.8%, slightly above the NEXT brand’s 18.3% and well ahead of the 12% generated by third-party brands.
This means NEXT is expanding beyond its core brand without necessarily weakening profitability. Its wholly-owned brands and licences added more sales than third-party labels and generated a slightly higher online net margin than the NEXT brand itself. As they become a larger part of the business, they could therefore support overall margins.
However, UK sales of NEXT-branded products fell 0.5%, or £7 million. The company said the decline partly reflected an unusually strong comparison after disruption at a major competitor boosted NEXT last year. Customers may also have shifted some spending from the core brand to NEXT-owned and third-party labels sold through its platform.
International growth depends on marketing investment
International direct-to-consumer growth is now NEXT’s main revenue engine, with marketing spending central to its economics. Marketing expenditure increased 63% to £51 million, while incremental profit per £1 spent edged up from £1.75 to £1.77, remaining above NEXT’s £1.50 investment threshold.
Yet, management estimated that marketing generated 23 percentage points of the 24% rise in direct international full-price sales, leaving underlying growth of about 1% across the half after disruption in the Middle East drove an 8% decline in the first quarter.
Underlying growth recovered to 11% in the second quarter, partly reflecting pent-up demand, and reached 8% across the latest 15 weeks. NEXT considers that 8% rate a more realistic guide for the second half.
NEXT’s established overseas customers spend and return at similar rates to those in the UK, supporting the case for continued international investment. Excluding the Middle East, overseas customers who had shopped with NEXT for five years spent an average of £298 a year, compared with £292 in the UK. Among customers recruited in 2022, 33% of those overseas returned after their first year, close to the UK rate of 35%.
International marketing still consumes 10% of sales, compared with 3.8% in the UK. The model is working because returns have remained above NEXT’s investment threshold even as spending has increased, but it is not yet self-perpetuating, meaning continued expansion depends on paid acquisition retaining its effectiveness as the customer base scales.
Palmer noted that NEXT’s “careful planning, agility to move with the fast-changing market and laser focus on its strategy to deliver value and constant sales growth” have seen the retailer “immune to the troubles facing other parts of the high street.”
“The platform that their enviably strong previous financial year has provided means they are able to develop new product, high quality ranges, keep prices competitive and invest in efficiencies and new technology, all the while absorbing employment, operations and supply chain costs,” she added.
Cost savings are funding further growth
NEXT expects warehouse costs, including occupancy and depreciation, to fall from 6.8% of sales last year to 6.7% in 2026/27. The figure was 7.4% in 2023/24.
The retailer has been improving automation at its Elmsall 3 online warehouse, reducing handling costs and freeing funds for international marketing. This creates a useful operating loop: efficiency gains support customer acquisition, which adds online volume and gives NEXT more scope to spread fixed costs. New product systems are also intended to nearly halve the administrative workload that currently takes up 25% of product teams’ time.
AI offers a longer-term version of the same operating-leverage strategy. NEXT aims to raise productivity across the software-development lifecycle by at least 30% over two years and estimates that AI could cut the cost of modernising its legacy mainframe from about £50 million to less than £10 million.
UK caution shapes the second half
The clearest counterweight to the upgrade is the UK outlook. As reported this morning, NEXT reduced its forecast for second-half UK sales growth from 2.8% to 2%, citing household costs, mortgage payments and a weaker labour market. Higher fuel and energy expenses are also expected to slow profit growth.
This comes after NEXT’s earlier estimate that the Iran war could cost £47 million. Price increases of up to 8% were introduced in some international markets.
Yet Palmer’s UK outlook over the next half year is more positive. She notes that NEXT’s “vast footprint across shopping centres, high streets, retail parks and online internationally means it is able to suit the changing needs and behaviour of customers wherever they shop, providing the value that they will be looking for with gifting and clothing this Golden quarter.”
“From the unrelenting growth we have seen from the fashion giant over the years and its once again raised profit guidance, NEXT has its eyes on the prize and will no doubt be one of the winners who sweep up this festive season,” she added.