Next anticipates a cooling in retail demand

Next anticipates a cooling in retail demand

UK high street chain Next saw its shares slump on the London Stock Exchange today (4 August), when it told traders that consumer demand in the UK was likely to decline this year.

The retailer's shares were down 7.8% this-morning to GBP20.39 (US$32.5) following its latest trading statement.

According to the retailer, same-store sales fell 1.5% during the first-half, with further declines likely in the second-half.

Adam Cochrane, analyst at UBS, told just-style: "The main reason [for share prices falling] is a combination of lower than expected sales on the retail side of the business, with the boost to Directory not fully offsetting this."

The company has also opened a greater ratio of home to fashion stores, which Cochrane says has resulted in a lower sales density.

"Cotton prices are up significantly year-on-year, and freight prices are also rising," Cochrane says. "Most retailers will tell you there will be some price inflation next year."

Next, which has a 7% share of the UK clothing market, did see total branded sales for the 26 weeks to 31 July 2010 grow 3.1%, but issued warnings over sloping demand and possible price hikes.

It said: "There has been a noticeable cooling in retail demand in recent months, the mood amongst consumers is best characterised as cautious.

"We believe that consumer spending will be more restrained in the second half than in the first, as spending cuts and tax rises begin to take effect."

Next is also concerned about increased supplier costs, saying they are likely to filter through to selling prices.

Next added: "The combination of higher cotton prices, capacity tightening and a lower dollar costing rate mean that we will experience input cost price inflation in the first half of 2011. We aim to mitigate some of the effects of this with the development of new sources of supply and more rigorous negotiation.

"However, the combination of increasing cost prices and the January 2011 VAT rise mean that clothing retail prices are likely to rise in spring 2011. We have yet to purchase the majority of our spring summer ranges, but we estimate that selling prices may rise between 5% and 8%."

The 5-8% price increase was higher than UBS analysts anticipated, but said they would result in further potential sourcing and efficiency gains. "With an uncertain macro outlook there is a slight downside risk to FY12 numbers," UBS added.

Cochrane adds that considering the VAT rise, the price increases may not be as severe as they first look.

What's more, Next has not yet purchased any goods under the conditions it describes, meaning it is prepared for the worst even if it doesn't prevail.