High street fashion-to-homewares giant Next (NXT) cheapens 3.1% to £62.35 after warning full-year sales and profits will indeed disappoint. Mild temperatures continue to crimp sales of high margin winter clothing, causing the cautious clothing retailer to downgrade expectations.
The FTSE 100 retailer's profits warning comes as no surprise, given third quarter expectations were already lowered following last month's unscheduled sales update (30 Sep), which sent a chill wind through the clothing sector. Unseasonably warm weather is hitting all the apparel retailers, with customers putting off purchases of autumn/winter ranges, a trend offering a negative read-across for the likes of Marks & Spencer (MKS) and Debenhams (DEB).
For the quarter to 25 October, sales grew 5.4% against the company's original expectation of 10%, with Next unable to recoup lost sales as colder October climes failed to materialise. Given forecasts for a warm November, the prospect of heavy discounting looms and Next has prudently pared its growth expectations for the peak Christmas selling season, particularly in light of last year's tough final quarter 'comps'.
The retailer therefore downgrades its mid-range year to January pre-tax profit forecast from £795 million to £770 million. Though the warning is disappointing given Next's track record of upgrades under CEO Simon Wolfson (pictured below), bear in mind that the new £750 million-to-£790 million profit range still represents year-on-year growth of between 8% and 14%. Bulls will also flag the fact that the copiously cash-generative retailer has already returned £361 million of surplus cash to shareholders via buybacks and special dividends this year.
(Next CEO, Simon Wolfson)
Picking up on the lowered Q4 guidance, Investec Securities trims its price by 3% to £68, though the broker sticks with its 'hold' rating: 'We suspect this reflects some excess/unsold stock from Q3, and the sector read-through for clothing suggests a risk of a highly promotional run-in to Christmas.'
Over at Cantor Fitzgerald Europe, retail scribe Freddie George is more positive, sticking with his 'buy' rating but lowering his price target from £74 to £71: 'Our view is that the current slippage is completely due to the mild weather, the underlying trend for consumption remains positive and the comparatives for next year ease. It does appear, however, that we are seeing more extreme weather patterns.'