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Next lifts profit forecasts after better-than-expected Christmas sales

Next participated in the Black Friday discounting frenzy before Christmas for the first time - Paul Faith/PA 
Next participated in the Black Friday discounting frenzy before Christmas for the first time - Paul Faith/PA

Next shares have surged by almost 10pc on the back of delivering a surprise lift in festive sales and inching up its profit guidance after beating gloomy City forecasts.

Analysts had been concerned that shoppers had reined in spending over Christmas as household budgets had been squeezed by slowing wage growth and a jump in inflation. Industry figures had also shown a sustained slump in shop footfall over the last month, but Next has revealed that its festive season has been rescued by stellar online sales.

The fashion retailer, which warned in November that trading was “extremely volatile”, posted an unexpected 1.5pc lift in total sales for the 54 days to Christmas Eve. Next said that the improvement in sales was partly “down to much colder weather in the run up to Christmas”.

This comfortably beat its own guidance of a sales fall of 0.3pc and analyst expectations of a 0.5pc slump, providing some much needed cheer to the retail sector. As a result, shares in rivals Marks & Spencer, Debenhams and Primark owner ABF - which will all report over the next ten days - also rose.

"One robin doesn’t a Christmas make, but this is a good start from Next, and the John Lewis numbers (due to be updated on Wednesday) suggested that trading there across Black Friday and early December had been better than recent months," commented Jonathan Pritchard, an analyst at Peel Hunt.

Next

Richard Hyman, an independent retail expert, cautioned that investors shouldn't "revise their view of the retail temperature" in light of Next's upbeat results because it was already one of the UK's strongest retail brands with a significantly larger online presence.

Next shop sales fell by 6.1pc during the fourth quarter while online sales, which include sales of other brands such as Boden, Calvin Klein and Superdry through its Directory business, grew by 13.6pc. Around 1.1pc of the total growth came from new stores.

Lord Simon Wolfson, chief executive, said he expected the spending shift from stores to online to continue “for the forseeable future” and that Next’s improved online performance was largely down to the extra £12m it had invested on its mobile website and software over the past year.

Like most fashion retailers, Next had suffered a dreadful October as warmer temperatures dampened shoppers’ enthusiasm for buying winter coats and jumpers. This encouraged much of the high street to take desperate action and start discounting before Christmas and during Black Friday, which Next participated in for the first time ever.

Lord Wolfson said that Next would “probably” repeat its Black Friday promotion as it had helped to clear some of its summer clothes while the amount of stock it sold at discount during the period was down 6pc on the year before.

Lord Simon Wolfson, Next chief executive
Lord Simon Wolfson, Next chief executive

The retailer said that its better-than-expected full-price sales meant that it would marginally lift its central profit guidance by £8m to £725m to give a new range of £718m to £732m.

The upbeat Christmas trading is a stark contrast to last year when Next spooked the retail sector with a shock profit warning and fall in sales which resulted in £1bn being wiped off its market value. The bleak update set the tone for most of the year with Moody’s warning that it would face “weak or anemic earnings growth” this year.

However, Lord Wolfson said that he was more confident about Next’s prospects in the year ahead. “At this point last year, we had recognised that there were some ommissions in our clothing anges, but I am much happier about where we are now.”

Next said that it still faced many of the same challenges as last year including “subdued consumer demand driven by a decline in real income, the increase in experiential spending at the expense of clothing and inflation in our cost prices”.

However, the retailer said that it expected that some of those “headwinds will ease as we move through the year”, particularly as cost price inflation from a weaker pound will reduce to 2pc in the first half and disappear in the second. Last year, Next had to raise shop prices by up to 5pc to cover the higher costs resulting from the sterling slump.

Next said that it expects profit to be lower next year at £705m as operational costs grow faster than its sales but it would hand a forecasted £300m of surplus cash back to investors in 2019 via a share buyback. The company reports its full year results for 2017/2018 on 23 March.

 

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