• FY earnings fall 4.7% to GBP635.3m (US$794m)
  • Retail gross margin narrows to 14.7%
  • Total group sales down 0.3% to GBP4.14bn
Next has booked its first fall in annual profits in eight years

Next has booked its first fall in annual profits in eight years

UK clothing retailer Next Plc has booked its first fall in annual profits in eight years and issued a caution on the year ahead amid the threat of price inflation and a shift away from spend on clothing.

Earnings in the 12 months ended January 2017 dropped 4.7% to GBP635.3m (US$794m) from GBP666.8m a year earlier. Despite this being the first fall in earnings since the financial crisis of 2008, investors sent Next shares 8% higher in early morning trading thanks to growth in its Directory online and catalogue business.

Sales for the division were up 4.2% to GBP1.73bn, while Next retail sales fell 2.9% to GBP2.3bn. Retail net margins narrowed to 14.7% from 16.9% in the year ago period. Total group sales edged down 0.3% to GBP4.14bn.

Emily Stella, senior retail analyst at GlobalData, notes: "The retailer has faced numerous challenges over the last year: erratic weather, rising import costs as the pound depreciated, and Next Directory being hit by increased competition from online pureplays Asos and Boohoo. Not to mention a more general shift away from clothes buying in favour of spending on leisure."

Next admitted that by focusing on changing its buying culture, processes and adopting new trends, it had omitted some of its best-selling, heartland product from its ranges. These are the easy-to-wear styles that can be delivered in large volumes and lower prices across several colours.

"Corrective action is relatively straightforward and began in late January," the retailer said.

"Going forward we will continue to build on what we have learnt about the rapid development of new products and the delivery of new trends, with the proviso that those trends must be delivered in a way that all our customers can easily buy into. In re-balancing our ranges, we must be careful not to become overly conservative and throw away the excellent progress we have made in moving our buying processes forward."

Next also pointed to the challenge of price inflation, which it attributed to the devaluation of the pound. The retailer said it doesn't expect this to ease until the second half of 2018.

With increasing amounts of business being transferred online, Next also said it was "legitimate to question the long term viability of retail stores and whether the possession of a retail portfolio is an asset or a liability." The retailer is expecting headwinds to be felt most acutely in its retail business over the next year, as sales continue to migrate away from the high street to online shopping.

"The year ahead looks like it will be tough with a combination of economic, cyclical and internal factors working against us," said chief executive Lord Wolfson. "We are very clear about our priorities for the year ahead and how we can continue to make Next a better business for our customers."

For its first-quarter, Next is forecasting sales to be around the lower end of its previous outlook of a drop of 4.5% to a rise of 1.5%.

"All other things being equal, we expect some improvement in the second quarter and a more marked improvement in the second half of the year. This, of course, is subject to there being no further deterioration in the external environment as the year progresses," the retailer said.