Sales of Next’s full-price items dropped 0.3%

Sales of Next’s full-price items dropped 0.3%

UK fashion and homewares retailer Next Plc has revealed first-half sales in line with expectations but warned buying costs could rise due to the falling value of the pound since the EU referendum. 

In a trading update for the 26 weeks ended 30 July, the company said total sales increased 1.8% thanks to the successful clearance of sale stock left over from last year. 

However, sales of Next's full-price items dropped 0.3%, as growth of 4.9% in its directory catalogue and online business failed to offset a decline of 4% in retail sales. 

The retailer also warned that in the medium term the devaluation of the pound is likely to affect the cost price of its goods, but said it has currency hedging in place from January 2017.

"The impact of devaluation for next year has been partially mitigated by pre-referendum hedging and currency offsets from our euro and dollar overseas revenues," the company explained. "Based on current exchange rates, we expect our costing rates (the average value of sterling in the overseas currencies that we buy) to be around 9% worse than 2016/17."

Next narrowed its profit forecast and now expects to report between GBP775m and GBP845m in pre-tax profits in the year to January 2017, instead of the previously guided GBP748m to GBP852m announced in May. Sales guidance has been narrowed by 1% both at the upper and lower end of the range to maintain its central point, the retailer said, to reflect "the continued uncertainty and volatility of consumer demand."

Bernstein analyst Jamie Merriman said that while the results are in-line with consensus, it is still too early to observe the impact of Brexit on the consumer. 

"We believe that over the next 12-18 months, consumer spending is likely to be under pressure, given likely rising prices and the potential for higher unemployment. We do not believe that this is priced in yet. We expect total shareholder return at Next will slow materially versus historical averages, yet Next continues to trade at ten-year average multiples, and we see risks that Next's earnings will miss expectations."

Nivindya Sharma, senior analyst at Verdict Retail, says the comparison between Next Retail's full price and total sales "highlights the retailer's continued struggle to draw in shoppers for its new season collections despite affordable price points, regular newness, good quality and broad appeal."

But she believes Next's plans for a more responsive buying pattern, regular product drops and frequent change to in-store merchandising and window displays should help to rectify some of this.

"The retailer expects cost prices to rise by 5% on like-for-like products next year as hedging contracts run out, but is prepared to mitigate most of this by increasing supply from new bases such as Bangladesh, Cambodia and Burma (Myanmar).

"Next's considerable supply chain capacity means it is in a better position than other smaller retailers, but fundamental changes to buying and phasing will be essential to safeguard market share in light of consumers' changing shopping patterns."