Overview: the next step

On Wednesday FTSE 100 clothing retailer Next releases interim results for the
six months to the end of July 2006.The results come at a difficult time for the
group, which has had to cope with the departure of its well-known chairman David
Jones and a tough high street. The focus on finance director David Keens
(pictured) will be particularly intense, as investors look at his efforts to
control costs and increase margins.

WHAT’S HAPPENED?

In March, Next revealed that, despite challenging market conditions, the group
had managed to increase turnover for the year ended January 2006 by 8.7% to
£3.1bn and grow pretax profits for the period by 5.8% to £449.1m.

Next’s directory business was the fastest growing in its portfolio, with
revenue growth of 13.7% and an increase in profits of 18.5%.

Keens’ stamp on the solid 2006 results was evident given the group’s focus on
protecting the bottom line, guarding gross margin and improving efficiencies
through enhanced stock management and wage control.

Next chief executive Simon Wolfson called for more of the same from his FD,
warning that the group was budgeting for negative like-for like sales for
2006/2007 and would remain focused on defending profits.

WHAT’S GOING TO HAPPEN?

Since March, nothing much has changed. Consumers’ purses remain squeezed by
increasing energy bills and transport expenses, while the Stuart Rose revolution
has seen Marks & Spencer eat into Next’s market share. Expect Wolfson and
Keens to announce further steps to cut costs and protect margins.

Don’t be surprised, either, if Next unveils plans to invest more heavily in
its Next Directory. Like any good FD, Keens will allocate capital to the parts
of the business that deliver the best returns. With an almost 20% increase in
profits, Next Directory is certain to be the first in line for investment when
Keens loosens the purse strings.

One can also expect more returns to shareholders. Even during these tough
retail times, Next has managed to give cash back to investors. In March, the
group undertook a £217.5m share buyback and has vowed to continue doing the same
in the future.

Finally, don’t expect the interim results to be exclusively about cutting the
cloth. Next hasn’t doubled its profits over the past five years by only
scrimping and saving. When Wolfson and Keens see opportunities they are not
afraid to spend. More additions to the group’s 4.3m square feet of retail space
are a certainty.

Analyst views on Next’s prospects have been very different over the past six
months. Over the past year, some have expressed concern about falling sales and
the high street slump, while others have remained upbeat about the group’s
ability to generate cash and grow its share price. Next’s stock has climbed
9.91% during what has been a tough period.

Analysts at ING have not had much enthusiasm for the stock, arguing that
decreased sales mean that Next is going to either have to cope with slower
growth in the UK or begin a bold, risky expansion abroad.

Dresdner Kleinwort, however, has encouraged clients to buy the Next shares.
The investment bank’s analysts have said that Next’s balance sheet is strong and
can handle much more debt. The recent share buyback is another plus, Dresdner
said, as it will boost 2006/2007 earnings per share by around 3%.

The interim results next week may well serve to pull together these divergent
viewpoints on the business.

Go to www.next.co.uk to view the interim
results