Happy Christmas Next? Co beats dire forecasts despite likely profits dip

By

Sandra Halliday

Published
Jan 3, 2019

So it’s started. The deluge of trading updates expected from UK retailers in the weeks ahead has begun with Next and after all the speculation about plunging sales, what actually happened? 

Well, they weren’t too bad. At least they beat the direst predictions, even if the update did come with a small downgrade to its profit expectations. 

Analysts had predicted that the physical stores fall would be almost 13% while e-sales would rise ‘only’ 10%. In the event, full-price store sales fell by 9.2% and online sales rose 15.2% in the Christmas trading period, the nine weeks between Sunday October 28 and Saturday December 29. 

Ok, the physical stores drop was worse than the 7.2% fall of this time last year. But the online growth was bigger than the 14.9% recorded in that earlier period - a feat that was even more impressive given how much harder it is to achieve significant online growth as the e-business gets bigger. There was a sting in the tail of the higher e-sales growth though as costs rose because online is a more expensive channel to service. But more of that later.

HIGHER SALES

It all added up to a total full-price sales rise of 1.5%, which was in line with the guidance issued back in September - also a fairly impressive feat considering how volatile and unpredictable the season was. That 1.5% was made up of higher product sales and higher income from the interest it charges customers paying on credit. Without that interest included, product full-price sales were up only 1% compared to a 2.6% rise a year ago. Of that, 0.6% was due to new space, so while the like-for-like sales figure may have only been 0.4%, it was at least in positive territory.

Next said that the three weeks prior to Christmas saw “strong sales”, as did half-term holiday week at the end of October, and these periods “made up for disappointing sales in November.”

The company also provided a chart showing just how the wider autumn/winter season fared and the red lines for November are very clear, highlighting how the month took over from October as the nightmare month in 2018.

CLEARANCE

Of course, the figures so far are all about full-price sales. But what about clearance items? Stock in the end-of-season sale (including the stock it put into its Black Friday event) was up 3% on last year so there was clearly a bit more product that needed to be marked down. But clearance rates “are broadly in line with our expectations and are consistent with the profit guidance given in September,” we’ve been told.

For the year, the company now expects full-price sales growth of 3.2%, also in line with the guidance given in September. 

But while that news is reasonably good given analyst expectations, the update also came with a profit warning, albeit a tiny one. Next’s central guidance for full-year profit is now £723 million, lower than its previous guidance of £727 million.  

The £4 million difference is a result of two factors. Firstly, “higher sales on seasonal products, such as personalised gifts and beauty products, reduced margin by £1.5 million.” These areas “make a healthy net margin” but lower than its clothing ranges. The remaining £2.5 million reduction came as a result of the increased operational costs associated with the higher online sales.

That would mean a drop in full-year profit of around 0.4%, although the company also said that “profit may increase or decrease by up to £5 million depending on sales and costs in January.”

Next year, its central guidance for full-price sales growth (including interest income) is a rise of 1.7%, in line with the current H2 performance. In the year ahead, it’s assuming “a similar economic environment as that experienced in the second half of the current year.” And that means store sales should fall 8.5% while online should rise 11%.

The company added that “any sales forecast made in January comes with a high degree of uncertainty.” And it said that this year, “uncertainty around the performance of the UK economy after Brexit makes forecasting particularly difficult. We have not factored into our sales estimates the potential benefits of a smooth transition or the downsides of a disorderly Brexit.”