Total group sales for the six months were up 3.7% to GBP2.06bn

Total group sales for the six months were up 3.7% to GBP2.06bn

Shares in Next Plc were down by more than 4% this-morning (19 September) after the apparel retailer maintained its full-year guidance despite a rise in both earnings and revenue for the first half, and pointed to price cuts in the event of a no-deal Brexit.

The company, which is one of the UK's largest retailers, said full-price sales were up 4.3% for the 26 weeks to 27 July, while brand total sales, including markdown sales, increased by 3.8% to GBP2.01bn (US$2.51bn) on last year.  

Total group sales for the six months, meanwhile, were up 3.7% to GBP2.06bn, while online sales surged 12.6% to GBP1bn. Sales at retail stores, however, fell 5.5% to GBP874.3m.

Profit before tax rose 2.7% to GBP319.6m while operating profit increased 3.1% year-on-year to GBP340.9m. Net profit, meanwhile, was up 2.5% to GBP260.5m.

Brexit impact

The retailer said it is "very hard" to determine whether the uncertainty over Brexit is having any effect on consumer spending and says it "can find no evidence" that it is affecting spending on small ticket price items.

"Some suggest that the fact of Brexit, of itself, might undermine consumer confidence. Certainly, the first few weeks of the autumn season have been disappointing. However, we believe that the warm start to September has done much more to hinder sales than the political temperature. Our experience is that political storms, of themselves, rarely affect sales and consumers only change their behaviour when those events directly impair their income or increase their non-discretionary expenditure.

"Our view is that Brexit will only materially affect consumer spending in the event that it triggers inflationary pressure on prices or logistical problems at our ports."

The retailer also said it does not anticipate any material price increase in its products due to a combination of currency hedging, falling commodity prices and continued development of its sourcing base.

In the event of a no-deal Brexit, it added the UK's tariffs on clothing will fall under the government's new temporary tariff regime announced in March, which it estimates would reduce the company's import duty costs by "around GBP25m" as savings from lower worldwide tariffs would significantly outweigh the additional cost of new tariffs on EU goods.

"All things being equal we would pass this saving onto consumers and the proposed tariffs would reduce our cost of goods by around 2%," it said. 

Looking ahead, Next's guidance for the full year remains unchanged since its July trading statement, which includes full-price sales growth of 3.6%. Group profit before tax, meanwhile, is estimated at about GBP725m, up 0.3% on last year. 

The retailer noted the forecast does not account for the potential effects of a deal or indeed of a no-deal Brexit.

"At this time, it is impossible to predict whether the UK will leave the EU with or without a deal and equally difficult to predict the effect no-deal might have on the wider UK economy. So, our guidance comes with one important caveat: we have not accounted for the possible positive effects of a deal or possible negative effects of a no-deal Brexit."

What the analysts say

Richard Lim, chief executive of Retail Economics, says in the context of such a challenging market, these are solid numbers.

"The impressive growth of online sees the retailer ahead of the game, benefitting from the vast investment in digital and the impressive omnichannel proposition it offers.

"Shoppers expect to seamlessly bounce across physical and digital channels, often at the same time, choosing a blend of digital and in-store experiences that match their needs and rising expectations. The retailer has successfully repositioned its business to meet this new reality, evidenced by the majority of its sales now occurring online."

However, Lim says store profitability remains under pressure as spiralling business rates and labour costs have eroded their margins.

He adds: "But the purpose of the store is rapidly evolving from mere distribution hubs to media channels which stage meaningful experiences, support online sales and build the brand. Old metrics like 'sales per square foot' have been resigned to the history books."

Greg Lawless, analyst at Shore Capital, notes Next remains a "well-managed company" with tight cost and stock control, a clear well-executed strategy and an experienced management team.

"Given that the Q2 trading statement at the end of July resulted in a small upgrade to FY profit guidance, we did not expect further upgrades ahead of the peak trading season," he says. "These are a solid set of results despite the tough trading challenges and structural headwinds in the sector."

Emily Salter, retail analyst at GlobalData, notes Next has continued to outperform as its "robust and ever-improving" online channel helps it to benefit from the underperformance of its midmarket competitors such as Marks & Spencer, Debenhams, and House of Fraser.

While its third-party brand portfolio is a "vital part" of the online channel's success, Salter says competitors including and Asos stock similar third-party brands, so Next must ensure it builds awareness of its branded offer and convenient fulfilment methods, as well as remaining in favour with the brands themselves – Next states that it aims to be its partner brands' most profitable third-party route to market.

"Exclusive brand collections would also aid this, with Joules launching its men's formalwear collection only with Next," she adds. "Next Pay, its credit scheme, and Next Unlimited, its delivery saver scheme, are two attractive key components of the online channel that help to build shopper loyalty, as well as its distinct focus on family shoppers.

"As the business transforms from a traditional retailer to a platform based business servicing a wide variety of clothing and home brands it has the potential to become not just a leading global online brand in the long term but also one of the most profitable."