A revival in demand for dress attire led to better trading than expected at Next during the run-up to Christmas, but the retail chain also warned of tougher times ahead as rising prices threaten to erode consumer spending power.
Issuing its fifth profit upgrade in less than a year, Next said full-price sales during the eight weeks to December 25 were 20 per cent higher than in the same period before the start of the pandemic in 2019. It is now predicting an underlying pre-tax profit of £822 million for the year to January 31, up from the previous consensus of £813m and more than a fifth higher than the £670m it forecast at the start of the financial year.
Looking ahead to trading in the next 12 months, Next anticipates a 7% increase in full-price sales with profits in the region of £860m. This assumes no further disruption from the Covid pandemic, although other economic concerns remain.
These include the impact of inflation for essential goods such as fuel, electricity and food, forthcoming increases in National Insurance tax, and possible increases in mortgage interest rates. Any of these, Next said, could reduce discretionary spending on clothing and homeware.
Likewise, the return to spending on overseas holidays and other social activities could depress demand for other discretionary goods. Furthermore, the group said it remains unclear to what extent the buoyancy of the last nine months has been the result of pent-up demand, and how much this might reverse in the coming year.
“So much will depend on what happens with people’s wages,” chief executive Lord Simon Wolfson said.
Next further cautioned that its own prices will rise in the coming months, with increases of almost 4% this spring and summer followed by a 6% hike on its autumn ranges.
“We have revised our estimates for selling price inflation in the year ahead, mainly as a result of the unanticipated persistence of higher freight rates into the back end of the year ahead, along with some further increases in manufacturing costs,” the company said.
“In addition to the increases in the cost of our goods, we are also experiencing increases in UK operating costs, mainly as a result of UK wage inflation. We anticipate that average wage inflation across the Next group will be 5.4%, driven by the increase in the national living wage of 6.6% along with wage inflation in sectors where there are labour shortages, most notably in warehousing and technology.”
Lord Wolfson, who warned in September that a shortfall in seasonal workers could threaten Next’s festive services, said staff absence rates are currently “about double” normal levels but remain manageable in most areas of the business.
Stock levels were “materially lower” than the group would have hoped during the run-up to Christmas and are not expected to return to normal until April. Next also experienced “some degradation” in Christmas delivery services because of labour shortages in warehousing and distribution.
“The fact that our sales remained so robust in these circumstances is, we believe, testament to the strength of underlying consumer demand in the period,” the company said.
Sales in Next shops were down 24% on pre-pandemic levels over the year, but online sales were 49% higher with its Label business putting in a particularly strong performance.
Full-price online sales by Label – which sells brands such as Ted Baker, Nike and Mint Velvet – were up 85% in the fourth quarter when compared to the same period in 2019. Online sales of Next goods in the UK rose by 31%, more than offsetting a 5.4% decline in sales across its stores in the UK and Ireland.
Despite concerns about costs and broader economic uncertainties, Next said it will pay a further special dividend of 160p per share, worth £205m, to investors at the end of January. Thereafter it will revert to a conventional pattern of interim and final dividends.
Richard Lim, chief executive at Retail Economics, said the results were “mightily impressive” and reflect the effortless transition shoppers now make between buying online and in-store.
However, he added: “The outlook for 2022 looks more challenging. For many households, this year will be a ‘pinch point’ as the combination of tax hikes and a rise in the cost of living erode incomes.”
Next shares closed more than 3% lower yesterday, down 268p at 7,770p, reflecting the cautious outlook for the coming year.