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Next still facing UK retail challenges amid weak consumer demand, analysts caution

Weak consumer spending will continue to drag on Next's sales this year
Next's sales have been supported by favourable weather in recent months

Next Plc (LON:NXT) has impressed investors today by raising its full year estimates but analysts have warned the fashion retailer continues to face a challenging market.

The company raised its full year pre-tax profits to a range of £687mln to £747mln from a previous estimate of £680mln to £740mln.

It also lifted its annual full price sales guidance to range of a 2.0% decline and a 1.5% increase, from the 3.0% drop to a 0.5% gain it predicted earlier.

READ: Next shares surge as the fashion retailer lifts full-year estimates

The group said while the retail environment remained tough its prospects appeared "somewhat less challenging” than they did six months ago.

Next also said slump in the pound had not affected the business as much as it anticipated. It initially thought prices would rise by 5% on the weaker pound but excess capacity in the clothing manufacturing sector meant it had managed to negotiate better terms.

Next sees price rises of no more than 2% and no price rises at all in the second half of 2018.

Shares jumped 10.07% to 4,869p at midday trading in response to the improved outlook.

Its full year guidance was provided alongside its first half results, which showed profit before tax dropped 9.5% to £309.3mln and total group sales fell 2.2% to £1.9bn.

Next still not out of the woods

Some analysts said that although Next’s prospects seemed to have improved it is still not out of the woods amid softer consumer spending, hit by rising inflation and weak wage growth.

In fact, the company said the wider economic environment, clothing market and High Street look “as challenging as ever” and did not underestimate the task of managing its stores through a period of prolonged negative like-for-like sales.

“We believe today's more confident outlook from management and upgraded guidance is likely to act as a stimulus for share price appreciation however there are still long-term issues for the company to address,” Shore Capital analyst George Mensah said.

“Investors can take comfort that management has, in our view, taken a more proactive approach in addressing such issues and we believe this is a factor in the improved outlook reflected in today's statement.“

Neil Wilson, senior market analyst at ETX Capital, said despite the slightly brighter outlook profits are still expected to fall this year and sales are unlikely to return to growth.

“To be clear, this is no high street revival,” he said, pointing to the group’s first half decline in sales.

Next Directory driving growth 

Next’s improvement has been driven by growth in its online shopping arm Directory. In the first half the business saw full price sales growth of 7.4% and a total sales increase of 5.7% to £868.4mln as the number of active customers rose 4% to 4.9 million.

Wilson noted that the group’s leases by value will have expired within the next 10 years, giving it flexibility to start managing down store volume to complement Directory.

“Currently over 50% of online orders and 80% of returns are fulfilled through stores. But Next should be doing more here - fewer, smaller and leaner stores might be where the future lies,” he said.

George Salmon, equity analyst at Hargreaves Lansdown, said the decision to spend £11mln on refreshing the website, including the recruitment of 121 extra systems and marketing staff, seemed to be paying off.

“While the high street business continues to splutter, Next’s Directory divisions seems to have turned the corner,” he said.

Cooler weather to boost Next's sales

Next may also receive a boost by the earlier-than-usual arrival of cooler weather that could increase sales of Autumn/Winter items and kick-start the run in to the key Christmas period, according to Mike van Dulken, head of research at Accendo Markets.

The company has been lucky with the weather recently, returning to quarterly sales growth in the second quarter after warmer days supported demand for its summer clothing range.  

READ: Next shares soar as it returns to quarterly sales growth and declares special dividend

The group has also seen less challenging trends over the last three months with Directory sales growth stronger in the second quarter, leaving management more optimistic about the rest of the year, Van Dulken said.

“Shareholders may even be wondering whether today’s upgraded guidance figures are conservative, destined for a beat to ensure a 2016-17 run of downgrades is water under the bridge,” he said.

UBS lifts full year estimates 

UBS raised its full year pre-tax profit forecast by £10mln after the first half results beat its expectations and the company raised its own estimates. In the second half it expects the like-for-like sales decline in the retail business to ease to 8% from 10% in the first half and sees Directory full price sales growth of 7% in line with the previous six months.

“The main risks relate to Black Friday promotions, fourth quarter ranges and the weather,” the bank said. 

“Momentum should also be good into first quarter of 2019, although some industry capacity reduction is needed at some stage to take the pressure off if the market remains under pressure.”

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