Can NEXT plc Make £1 Billion Profit?


Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at NEXT (LSE: NXT) to ascertain if it can make £1bn in profit.

Have we been here before?

First off, it’s quite easy to see that Next has never been able to make £1bn in profit and it would appear that, based on the company’s own forecasts that it will struggle to do so in the near-term. Nevertheless, Next has been somewhat of a major success story during the past few years, as the company has outperformed the majority of its retail sectors peers despite the tough retail environment.

And it would appear that 2013 was yet another of impressive performance from Next. Specifically, Next’s management revealed at the beginning of January, that store sales had jumped around 8% between 1 November and 24 December, the key Christmas trading period — online sales expanded 21%.

Further, Next’s management revealed within the same trading statement that pre-tax profits for 2013 were going to be in the region of £700m, up 5% from 2012 figures. Next is set to report full-year 2013 numbers on the 20th of March.

But what about the future?

Sadly, despite Next’s relatively upbeat forecast for 2013, the company’s management believes that 2014 will not be such an exciting year for the company. Indeed, at the same time the retailer announced its impressive Christmas trading results, management issued a sobering outlook:

“The problem of little or no growth in real earnings looks set to persist for some time, and we cannot see any reason to expect a significant increase in total consumer spending in the year ahead.”

Unfortunately, it would appear as if City analysts agree with this view. In particular, current City forecasts predict that Next will make a pre-tax profit of £790 by 2016, growth of 13% from current levels, 6.5% per year, half of Next’s historic annual growth rate.  

Still, even though Next’s growth is set to slow over the next few years, the company’s well-timed share buyback plan is helping to push earnings per share higher, which should lead to a higher share price. Indeed, even though City forecasts only predict a 13% rise in pre-tax profit over the next two years, analysts expect earnings per share to jump 30%. 

Foolish summary

Overall, it possible that Next could hit my profit target in the long-term, although the company’s downbeat forecasts imply that the retailer will struggle over the next few years.  So, I feel that Next cannot make £1bn profit. 

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In the meantime, please stay tuned for my next verdict.

> Rupert does not own any share mentioned within this article.