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Next to report first annual profit decline in eight years as Brexit hurts retailers

Last updated: 06:01 23 Mar 2017 GMT, First published: 12:01 22 Mar 2017 GMT

Next

Fashion retailer Next Plc is (LON:NXT) is set to report its first decline in full year profits for eight years as consumers begin to feel the pinch of rising inflation.

The company in January cut its pre-tax profit guidance to £792mln for the year to end of January 2017 from a previous estimate of £805mln, down from £821.3mln a year earlier, as it posted poor Christmas trading results.

The firm also forecast another fall in pre-tax profit for the following year to £680mln-£780mln, below analysts' current average estimate of £784mln.

The last time the group reported a drop in annual profits was in 2009 when the UK was barely recovering from the 2008 financial crisis.  

But like other UK clothing retailers, Next is facing the obstacle of rising import costs on a weaker pound following last June’s Brexit vote.

What this means is households’ disposable income are being squeezed by higher inflation, prompting consumers to spend more cautiously, particularly on non-essential items such as clothing.

HSBC expects a cyclical slowdown in demand in 2017, driven by cost push inflation, which it said presents a downside risk to Next’s 2018 earnings.

The bank also sees higher input costs from the sourcing of stock from US dollar-dominated countries, which accounts for 70% of Next’s cost of goods sold.

“In this regard we question whether Next’s intention of raising prices by up to 5% in 2017 to protect gross margins is the right strategy,” HSBC said, repeating a ‘reduce’ rating and target price of 3,530p.

“This will increase prices for the consumer and the price differential between Next and discounters to whom we expect customers to trade down in more challenging times.”

Aside from the industry pressures, HSBC believes the retailer’s issues are also company-specific.

Its online catalogue arm, Next Directory, is highly dependent on the credit business, which allows customers to buy items on credit and make repayments over a longer period. A decline in active credit customers is likely to put pressure on the Directory’s profitability in 2018, HSBC said.

The bank also noted that Next does not provide free standard delivery while sales at its stores are suffering.

Elsewhere, IG Group Holdings plc (LON:IGG) reports its third quarter trading update after achieving record revenue of £133.4mln in the second quarter, supported by market volatility surrounding the US Presidential election in November.

“We expect third quarter trading to have been less frenetic than the second quarter (which contained the election of Donald Trump) but to have continued to be good, driven by the significant increase in customer numbers seen in the prior two quarters,” Numis said.

“We forecast revenue of £134mln which while not materially higher than the very strong second quarter (£133mln) is a healthy 9.8% ahead of the third quarter last year which itself was 32.9% ahead of the prior third quarter.”

On the macro-economic data front, the Office for National Statics releases UK retail sales figures, which are expected to show a 2.6% increase in February compared to a year ago.

Thursday 23 March

Interim: Kier Group PLC (LON:KIE).  Finals: Curtis Banks Group Plc (LON:CBP, Futura Medical PLC (LON:FUM), Next Plc (LON:NXT),SOCO International PLC (LON:SIA), Science in Sport Plc (LON:SIS)

AGM / EGM: Conygar Investment Company (The) PLC (LON:CIC)

Trading Statement: Halma PLC (LON:HLMA), IG Group Holdings plc (LON:IGG)

Ex-Dividend: Private & Commercial Finance Group plc (LON:PCF, Octopus Second Aim Vct Plc (LON:OSEC), Redrow plc (LON:RDW), Segro (LON:SGRO), Tristel Plc (LON:TSTLNWF Group plc (LON:NWF), Meggitt plc (LON:MGGT), Bovis Homes Group PLC (LON:BVS), Dunelm Group PLC (LON:DNLM), Galliford Try plc (LON:GFRD), Heavitree Brewery PLC (LON:HVT), BlackRock Latin Am (BRLA)

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