To date, a small, exclusive club of UK retailers have exceeded £1 billion in annual profits, a high street elite that includes Tesco (TSCO), Marks & Spencer (MKS) and Kingfisher (KGF). Some may view this £1 billion figure as merely symbolic, but breaching this barrier is no mean feat and demonstrates a retailer has a lasting place in consumers’ affections and the scale to win in a competitive marketplace. We address the topic now because, barring any nightmares before or over Christmas, this club will shortly admit two new members.

Led by Simon Wolfson, fashion giant Next (NXT) recently upgraded its year-to-January 2025 pre-tax profit forecast from £995 million to £1 billion and is in a race to reach the ten figure earnings milestone with JD Sports Fashion (JD.), the trainers seller on track to deliver profits of between £955 million and £1.035 billion for the year to January 2025, so long as shoppers splash out on sneakers and athleisure over the Black Friday (29 November) and Christmas period.

A POISONED CHALICE?

Some British retailers have delivered profits of £1 billion, only for these elevated earnings to plunge afterwards, which might suggest the £1 billion barrier is somewhat of a poisoned chalice. Tesco exceeded the £1 billion level in 2001, then went on an aggressive overseas expansion strategy in Europe, Asia and US which ultimately blew up and was dismantled after the supermarket made a £6 billion loss in 2015 including impairment charges. Thankfully for shareholders, Tesco’s earnings have continued to grow in the intervening years and pre-tax profits closed in on £2.3 billion for the year to February 2024.

Billion pound profit club membership has proved more fleeting for others, such as Marks & Spencer, which has reached the £1 billion barrier on two occasions, in 1998 and 2008, but has struggled to get even close since. As Michael Crawford, manager of the WS Chawton Global Equity Income (BJ1GXX3) fund, recounts: ‘Marks & Spencer was the first to pass the milestone in its fiscal year ended March 1998. However, a combination of changing consumer preferences, increased competition from the likes of Zara and H&M (HM-B:STO) and operational issues, decimated subsequent profits. Even after a much-improved performance in the last three years, profits are well below the £1 billion threshold over 25 years later.’

B&Q-to-Screwfix owner Kingfisher became the third UK retailer to surpass the £1 billion profit mark when the Covid-era home improvement boom persisted into the year to January 2022, driving pre-tax profits up by a third to a smidge over £1 billion. Unfortunately, earnings have faded since amid waning DIY demand and soft market conditions in France.

Also meriting mention is cut-price clothing seller Primark, a part of groceries, sugar and fashion conglomerate Associated British Foods (ABF). The discount retailer’s profits soared more than 50% to top £1 billion in the year to 14 September 2024, albeit at the operating rather than the pre-tax level. Nevertheless, Shore Capital’s retail sage Clive Black insists Primark ‘can well and truly sit in the £1 billion club as its EBIT (earnings before interest and tax) sits after rent and depreciation, and Associated British Foods the group has no non-lease debt’.

MEET THE £1 BILLION PROFIT CLUB'S NEWEST POTENTIAL MEMBERS

WELCOME TO THE CLUB

Breaking the £1 billion pound mark will only cement the reputations of JD Sports and Next as two of Britain’s best-run retailers. On 2 October, the former reiterated year-to-January 2025 guidance for adjusted pre-tax profit in the £955 million to £1.035 billion range, having eked out sales-led profit growth in a difficult half to 3 August 2024 in which key supplier Nike (NKE:NYSE) grappled with numerous challenges. While the UK business is fairly mature, JD Sports Fashion has significant overseas growth potential, notably in the US, which should propel profits towards the £1.2 billion-to-£1.3 billion range analysts are forecasting for the year to January 2027.

On 30 October, the latter raised its year-to-January 2025 profit guidance yet again as colder temperatures boosted third quarter sales at Next, the billion pound profit club member which generates the highest operating margins by some stretch.

Anthony Lynch is co-manager of JPMorgan Claverhouse (JCH), the investment trust with stakes in Next, Tesco and Mark & Spencer. He informs Shares: ‘The main benefit of achieving this level of scale is what it means for distribution efficiency. Over time, we’ve seen many fashion brands and business models come and go in what is ultimately an industry with low barriers to entry but high barriers to success.’

Lynch explains: ‘All the while, Next has been quietly investing in its “Total Platform” offering, which offers logistics and software to third party clothing brands. Due to years of careful investment and scaling, it is now the most profitable route to market for many third-party brands. The result is a healthy ecosystem that serves the needs of consumers, brands, and Next. As the retailer continues to scale beyond the £1 billion profit mark, we anticipate its competitive position only strengthening further.’

Next is the biggest holding in WS Chawton Global Equity Income and Crawford looks forward to the retailer remaining a consistent club member for many years to come. ‘If you ask Lord Wolfson about revenue growth and growth targets you tend to get your head bitten off,’ says Crawford. ‘He equates value creation with managing the business to optimise and sustain high levels of return on capital. He will therefore only pursue projects likely to achieve such returns and will withdraw capital from areas failing to achieve the same. This is evidenced by the fact that in 2017, Next started to reduce capital deployed in its large retail estate across the UK. This was after 20 years of outstanding growth when pre tax EPS delivered compound annual growth of 17% driven by increasing retail selling space.’

Crawford continues: ‘Wolfson realised the future would be dominated by online shopping and started to redeploy capital to take advantage of this structural change. In the period 2017 to 2024 the top line did not grow at all; however, EPS grew a respectable 8% putting the £1 billion profit club membership into range.’

He adds: ‘Wolfson regards 2024 as the start of a new phase in the company’s development and he is as excited over the next five years as he has ever been. He cites three transformative developments. Firstly, retail sales from physical stores only accounts for 30% of sales. Secondly, 42% of online sale come from non-Next branded stock including third party brands such as the Barbour, Levi’s and River Island and finally, over a quarter of online sales come from overseas. The reduced dependence on the Next brand in the UK mitigates against the risk of loss of relevance. Entering overseas markets as an online disruptor, not requiring risky acquisitions nor expensive investment in assets, reduces the risk of over stretch.’

Eric Burns, deputy manager of the CFP SDL Buffettology Fund (BF0LDZ3), tells Shares that whilst pushing through the £1 billion profit barrier is ‘a fantastic endorsement of everything Simon Wolfson and the team at Next have achieved, it is nothing more than a number to us – and I rather suspect the same for him too. Next is one of those steady long-term compounders having grown pre-tax profit at an annual compound rate of around 5% over the past 20 years.

‘More importantly, though, it has put its free cash flow to good use by managing to invest for future growth whilst at the same time paying a decent dividend and buying back its own shares. This latter point has meant free cash flow per share has compounded at 11% per annum over the same time frame and is the more important metric than the £1 billion profit barrier in our view.’

IT'S BEGINNING TO LOOK A LOT LIKE CHRISTMAS

The so-called ‘Golden Quarter’ is the most hotly-contested period of the year amongst retailers, but Christmas 2024 could be a tricky one with household budgets remaining under pressure. The doom and gloom around the budget dampened the recovery in UK consumer confidence, though inflation is falling and employment levels are high, so shoppers should have more money in their pockets than this time last year.

For investors, the best strategy is to focus on retailers that are best-placed to bag market share this Christmas, into 2025 and beyond. According to the latest Kantar data, Britain’s two largest supermarkets, Tesco (TSCO) and Sainsbury’s (SBRY), have festive momentum, having outperformed the wider market over the 12 weeks to 3 November 2024.

Christmas shoppers and ravenous office workers grabbing a festive bake and a coffee on the move should boost Greggs (GRG), and we have an inkling cut-price gifts and greetings cards purveyor Card Factory (CARD) and affordable homewares retailer Dunelm (DNLM) should both do well.

MARKS & SPARKS – THE COMEBACK KID?

Shore Capital’s Marks & Spencer forecasts show adjusted pre-tax profits moving back towards the billion pound mark in the years ahead, with £893.9 million and £955.9 million pencilled in for 2026 and 2027 respectively. The billion pound profit club’s founder member has momentum entering the peak period. Alongside forecast-beating first half results (6 November), CEO Stuart Machin insisted his charge has ‘the best Christmas food range I’ve seen in my time at M&S and the most stylish seasonal clothing offer yet’. Marks & Spencer’s dependable food and revitalised clothing and home divisions are both gobbling up market share and Shore Capital believes the high street stalwart is ‘probably in its best condition’ approaching Christmas than it has been ‘for many years’, having upgraded its year to March 2025 profit forecast by 9% to £829.9 million following recent interims.

In its latest update (14 November), discount chain B&M European Value Retail (BME) insisted it is ‘well set up for the Golden Quarter’ and ‘encouraged by recent volume momentum’ entering the peak season, but Christmas could be a moment of truth as the groceries-to-general merchandise seller faces pressure from the supermarkets as well as direct rivals like Home Bargains.

Turning to the new £1 billion club members, only the brave would bet against another solid Christmas from Next. And while the athleisure market remains volatile, JD Sports’ strong brand relationships mean it will have received strong allocations of the most sought-after products in time for Christmas.

KEY TRADES TO MAKE

Next (NXT)

Price: £95.84

Market Cap: £12.1 billion

Forward price to earnings ratio: 15.4 

Dividend yield: 2.4%

It is worth paying up for fashion and homewares giant Next with taxable profits set to surpass the £1 billion mark so long as the winter chills keep the tills ringing this Christmas. The best-in-class operator should deliver good cheer for shareholders when it kickstarts the retail reporting frenzy on 7 January 2025. CEO Simon Wolfson likes to under-promise and over-deliver, so while growth is guided to slow for the rest of the year, a surprisingly bumper fourth quarter could yet drive further upgrades. Shares sees the cash-generative colossus as a long-term winner UK fashion and homewares winner as competition continues to weaken or exit the market, while overseas expansion and the Total Platform operation provide scope for profitable long-term expansion, along with dividends and buybacks.

Currys (CURY)

Price: 77.9p

Market Cap: £875.6 million

Forward price to earnings ratio: 8.5

Following the Covid boom, a technology replacement cycle is upon us with new AI-enabled computers exciting customers, which suggests a positive peak trading period is ahead for Currys (CURY). The TVs, laptops and mobile phones seller’s impressive turnaround continues under CEO Alex Baldock and Currys has positive momentum, with UK & Ireland like-for-like sales ticking up 5% in the 17 weeks ended 24 August. Panmure Liberum’s 135p price target implies more than 70% upside from these levels and the broker expects first half results (12 December) to show ‘incremental improvements’ on last year. With a net cash balance sheet and improved earnings quality, Currys looks well placed as interest rates come down and could deliver upgrades should robust trading continue. For the year to April 2025, Panmure Liberum sees pre-tax profits sparking up from £118 million to £130.2 million ahead of £155.1 million in 2026. Stockopedia data has Currys trading on a dirt cheap forward price to earnings ratio of 8.5 times, so a bumper Christmas could spark a re-rating.

Tesco (TSCO)

Price: 343.6p

Market Cap: £23 billion

Forward price to earnings ratio: 12.8

Dividend yield: 3.9%

Tesco’s proven strategy of investing in price and analysing data to drive more customers to its stores should help it outgrow the market and boost profits well beyond the near-£2.3 billion delivered last year. Led by CEO Ken Murphy, the supermarket has successfully fought back against German discounters Lidl and Aldi through its effective price-match strategy and according to the latest Kantar data, Tesco’s sales rose by 4.6% in the 12 weeks to 3 November 2024, taking its market share to 27.9%. Half year results (3 October) revealed a near-20% hike in taxable profits to the best part of £1.4 billion. ‘The combination of price, quality and innovation means we are as competitive as we have ever been,’ said Murphy, ‘and we have been the cheapest full-line grocer for nearly two years. As we approach the Christmas season, we are looking forward to sharing the quality of our festive food with customers, and can’t wait for them to taste it.’

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