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Downbeat news from Next clouds retail prospects

Disappointing festive update from Next sparks caution among investors

Next is finding it tougher as online competition increases

Next (LON:NXT) blotted its pristine copybook with a downbeat festive trading update on Tuesday, sparking fears that it could herald more bad news from the industry.

The fashion retailer, known for bucking downbeat high street trends with upbeat trading statements, blamed mild autumn weather and a stock shortage for a disappointing fourth quarter performance.

Chief executive Simon Wolfson has developed a reputation as a safe pair of hands able to cheer the market even when rivals are struggling.

But on Tuesday he acknowledged recent performance had been spoilt by issues including poor stock availability in its Directory online business from October onwards.

Wolfson also said online rivals were waking up to the challenge from Next while unseasonally warm weather had stopped people buying hats, scarves and other winter wear.

Sales in its shops fell 0.5% between October 26 and December 24 while online sales rose 2%. Total sales rose 0.4%.

Next said it continued to expect annual profits to come in within its previous guidance of between £810mln and £845mln.

But it revised its central forecast to £817mln with the possibility that it could rise or fall £7mln either way, which would still fall short of City forecasts of £829mln.

Alluding to the stock and competition issues, Wolfson said: “Whilst warm weather may have been the main reason for a difficult fourth quarter, we would not want to allow difficult trading conditions to mask any mistakes and challenges faced by the business.”

Retail specialists at Shore Capital said the sales figures were underwhelming compared to the first nine months of the financial year.

They also pointed out that some online competitors to Next were “ahead of the curve” in increasing sales capacity at warehouses and providing a wider range of delivery options.

Big issues

The news compounded concern that it could be a bleak New Year reporting season for other non-food retailers such as Marks & Spencer (LON:MKS).

Shore analyst George Mensah said: “Noting the pre-Christmas warming for Bonmarché (LON:BON) and given a remarkably milder than usual last quarter (CY2015), we wonder if a repeat could on the cards for the industry post-Christmas.”

Ketan Patel, associate fund manager at EdenTree Investment Management, noted that Next was traditionally the first of the big clothing retailers to report after Christmas and was also regarded as being one of the most well-run.

He pointed out that the company’s profit forecast, if achieved, still would represent a rise on last year’s figure and shareholder returns were among the best in the sector.

But he said: “If Next has not managed to trade well then you can imagine that M&S and other main retailers are going to have big issues.”

Patel also highlighted the fashion chain’s comments about growing competition in the sector.

“Next has got it right for a long time but it’s getting tougher,” he said.

M&S is the next of the big listed retailers to update the market this week, reporting on Thursday, although employee-owned John Lewis is set to update on Wednesday.

RBC Capital Markets said it believed the chain's general merchandise (GM) and clothing sales were likely to have stayed soft due to mild weather and tough trading after Black Friday.

"We also think availability remains an issue in GM as does the amount of "first price, right price" product.

"However we think food would have outperformed again over Xmas owing to its premium, convenience positioning and as such M&S should achieve a small positive LFL in Q3. Also we see potential for gross margin in GM to come in at the top end of expectations."

Quick facts: Next PLC

Price: 5934 GBX

Market: LSE
Market Cap: £7.89 billion

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