- Retailer delivers better than expected first-half results
- Full year sales and profit guidance downgraded
- Warns of inevitability of slower clothing and homeware sales
Shares in Next (NXT) slumped 9% to a one-year low of £48.48 after the best-in-class retailer cut its full year sales and profit guidance, warning it now ‘seems inevitable’ that clothing and homeware growth will ‘slow if not reverse’ as inflation begins to bite.
The disappointing downgrade came despite Simon Wolfson-led Next delivering a better than expected first half to July, with sales ahead of forecasts thanks to the over-performance of its brick and mortar stores and a rebound in formal wear sales.
SO MANY VARIABLES
In its outlook statement, Next warned that predicting near-term sales trends is unusually difficult with ‘so many variables at play’, ranging from energy, freight, employment, tax and economic migration to exchange rates.
CEO Simon Wolfson is also concerned about the consumer outlook given the cost of living squeeze, with inflationary pressures being exacerbated by the plunging pound.
Next’s sales slowed in August amid waning consumer confidence and the heatwave and despite a pick-up in September, the FTSE 100 retailer erred on the side of caution and modestly downgraded full year guidance.
Next has reduced its forecast for second-half full price sales and cut full year pre-tax profit guidance for the year to January 2023 from £860 million to £840 million, though this still implies year-on-year growth of 2.1%, demonstrating the resilience of the business.
WOLFSON WARNS
Wolfson warned: ‘As inflation begins to bite, it seems inevitable that clothing and homeware growth will slow if not reverse; though employment and savings levels are both at healthy levels, which provides some comfort.’
He added: ‘It is too early to tell what impact Government support will have, though it seems likely that the scale of the measures announced recently will serve to support spending in some way.’
And Wolfson cautioned: ‘Looking into next year it now looks as though the weakness of the pound, if it continues, will serve to inflate selling prices, particularly in the second half of the year.’
Next’s first half results were robust, with pre-tax profits coming in at £401 million, up 15.5% versus 2021 and 22.4% ahead of 2019 levels. Sales grew 12.3% year-on-year to £2.4 billion with retail sales up 63%, though online sales softened by 5%.
THE EXPERTS’ VIEW
Russ Mould, investment director at AJ Bell, commented: ‘Whatever is coming Next’s way the versatility of the business, which has allowed it to benefit from the recent preference for shopping in-store as opposed to online, a strong balance sheet, experienced management and its almost unmatched retail skills leave it well placed to endure.
‘Next may find it comes out of the current turmoil in a stronger market position as rivals are either weakened or fall by the wayside entirely.’
Shore Capital insisted Next remains ‘a well-managed company with tight cost and stock control, a clear well-executed strategy and an experienced management team. Given that the Q2 trading statement in August resulted in a small upgrade to FY profit guidance, we did not expect further changes ahead of the peak trading season.
‘In our view, despite the modest downgrade, these are a solid set of results in light of the sector’s tough trading challenges and structural headwinds.’
Julie Palmer, partner at Begbies Traynor (BEG:AIM), said Wolfson sees ‘two cost of living crises: a near-term supply side-led squeeze which will hit over the key festive period as consumer spending falls, then next year a currency-led one as the weak pound make imports more expensive.
‘There’s little Next can do about the first crisis apart from focus on efficiency and the most profitable parts of the business. Even though the company has currency hedges until next summer, in the longer term, with most of Next’s foreign suppliers pricing their products in US dollars meaning the weak pound makes them more costly, Lord Wolfson is looking to adapt the supply chain to get the best value.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Daniel Coatsworth) own shares in AJ Bell.
