Out-of-favour clothing colossus Next (NXT) has trimmed its annual sales guidance for the second time in less than two months following disappointing first quarter sales. The Lord Wolfson-led retailer also issues another sobering assessment of the consumer outlook, sparking fresh fears over the health of the high street.

Alongside March's full-year results, Next once again lowered its year to January 2017 guidance, forcing SHARES to turn negative on this long-standing retail favourite near-term. We expressed concerns over CEO Simon Wolfson's downbeat outlook statement – the retail grandee predicted this year would be the most difficult since the financial crisis - as well as the increasingly uncertain prospects for online and catalogue business NEXT Directory.

High Wycombe High Res 5

The main engine for growth over the past decade, Directory's growth has slowed sharply amid heightened competition, not only from pure-play online fashion purveyors, but also from traditional operators such as Debenhams (DEB) and Marks & Spencer (MKS), who've upped their e-commerce games.

News that Directory's sales rose 4.2% in the first quarter, helped by better stock availability since Christmas, helps Next's battered shares recover ground, up 3.6% to £51.55, though the update validates our recent bearish call.

Next reports full price sales down a disappointing 0.9% over the three months to 2 May, retail sales reversing by a worse-than-expected 4.7%. This reflects the impact of much colder weather in March and April which reduced demand for clothing over the Easter holiday period.

Simon Wolfson again issues a cautious outlook. He believes 'it is unlikely (but possible) that sales will deteriorate further, and we have seen a significant improvement over the last few days as temperatures have risen. However, the poor performance of the last six weeks may be indicative of weaker underlying demand for clothing and a potentially wider slow-down in consumer spending. Given this uncertainty, we think it is prudent to widen and lower our full price sales guidance range to -3.5% to +3.5%.'

Web - NXT - May 16

Accordingly, Next's pre-tax profit guidance is revised down from a £784 million to £858 million range to one of between £748 million and £852 million. Weaker demand for clothing spells bad news for the entire general retail sector, one of the stock market's poorest performers in 2016 thus far, with fashion purveyors facing a softer demand outlook, not to mention a higher wage bill and a US dollar sourcing headwind.

Issue Date: 04 May 2016