Next widens and lowers full year guidance amid weaker demand for clothing and a slowdown in spending
Next has widened and lowered its full year guidance on profits amid greater uncertainty in the retail sector, following its previous warning that the year ahead could be the worst since 2008.
Presumably investors appreciated the heads up: Next's share price was up 2.5 per cent in early trading and as the day wore on the clothing and homeware giant built momentum, with the share price up as much as 6.5 per cent in the afternoon.
Sales at the retail giant dropped 0.2 per cent for the three months to 2 May, with full price sales down 0.9 per cent – the lower end of its sales guidance for the full year, which ranges from a drop of one per cent to an increase of four per cent.
Sales at Next Retail were down 4.7 per cent, while Next Directory rose 4.2 per cent.
Next said that it thought it was "unlikely but possible" that sales could deteriorate further, noting that it had seen "significant improvement over the last few days as temperatures have risen".
However it has widened its guidance for the full year, dropping the lower end of the range for group pre-tax profits to £748m – a drop of 8.9 per cent on last year – while its upper end stands at £852m, an increase of 3.7 per cent.
Earnings could now come in anywhere between a drop of 6.6 per cent to a rise of 6.4 per cent.
Why it's interesting
Next is one of the most thorough retailers on the high street when it comes to forward guidance and usually under-plays its expectations for the full year, preferring to surprise on the upside.
If you're feeling optimistic, that means there is still plenty to feel confident about, given what Next has said about more recent trading.
However, this doesn't bode well for the rest of the high street – if Next is feeling the squeeze, you can be pretty sure others will be feeling it even worse. With two retailers entering administration last week, the high street could be about to get particularly tough.
What Next said
"Much colder weather in March and April reduced demand for clothing, particularly over the Easter holiday period, which was unusually warm last year. In the same period our Home and furniture full price sales, which are much less weather dependant, were up seven per cent.
"We believe 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 per cent to +3.5 per cent.
"The lower end of this range is based on sales for the rest of the year continuing to run at the rate of the last six weeks."
What analysts said
Charles Huggins, investment analyst at Hargreaves Lansdown, said: "Earlier this year Next warned the market that the consumer environment was becoming much tougher, and so it has proved. This latest update won’t do much to reassure investors, but with the shares having already lost a quarter of their value since the company’s last sobering assessment, a lot of bad news was already being discounted.
"Next faces intense competition from online players like Boohoo and ASOS, but also from traditional retailers like Debenhams, who have significantly raised their game over recent years, investing heavily in online operations. Next established an early advantage online with its next day delivery service, but the free lunch now looks to be coming to an end.
"We still view Next as a very well-run business. It earns class-leading margins of over 20 per cent. The record on cost control is unparalleled and the group's focus on cash generation over headline growth has been hugely successful. However, Next is clearly finding life tougher and the outlook for the business is more uncertain than it has been for some time."
It doesn't look good for the high street right now.