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Next's gloomy outlook ‘tip of the iceberg’ for fashion retail

Next’s share price dropped up to 14% on 4 January after the retailer reported a difficult Christmas trading period, causing wider concerns for the UK fashion market in 2017. 

Next’s full-price sales for the 54 days to 24 December slipped 0.4% year on year and the retailer cut its central profit guidance for the full year to £792m, from £805m. Next said the profit figure could fall by a further £7m “depending on trade in January”. 

The high street chain said it expected the slowdown in spending on clothing and footwear to continue for the next 12 months as inflation begins to erode earnings growth and the weakness of sterling causes price increases.

Shares at Next, which is viewed as a bellwether of the fashion retail market, slumped by 14% on yesterday’s price after the announcement, but had recovered 4 percentage points by mid-morning.

The share prices of Marks & Spencer and Debenhams fell by 4%, while Associated British Foods, Primark’s owner, dropped 3%.

Julie Palmer, partner business recovery firm Begbies Traynor, said the gloomy outlook had “spooked” investors and more profit warnings were likely: “First of the major retailers to announce its Christmas trading figures, Next’s surprise profit warning has spooked investors, causing the company’s share price to plummet, amid concerns that 2017 will be a dire year for consumer spending on the high street.

“With Next citing everything from the erosion of real wage growth and the devaluation of the pound to increased costs as a result of the new national living wage, higher energy taxes and the revaluation of national business rates, Next’s profit warning could be just the tip of the iceberg for the struggling UK retail sector.”

Ernesto Bisagno, vice president and retail analyst at Moody’s, said the market will remain challenging next year. “The trading environment for UK clothing retail remains volatile. Next’s earnings visibility for 2017 and 2018 worsened as the company guided another challenging year ahead with full-year profit down by between 2% and 14%.

This is due to further pressure on sales driven by lower spending on clothing and lowered real earnings due to the increased inflation; and additional operating costs due to higher wages and the impact of business rates revaluation.”

Meanwhile Emily Stella, analyst at Verdict Retail, said the retailer’s “underwhelming” performance is set to continue: “Next has long been a retail star, seemingly unable to do wrong. However it acknowledges that 2017 could be a challenging year as consumers continue to restrict spending and a devalued pound forces price rises.

”These results may mark the start of a difficult period for the retailer. As it stands, Next’s current shoppers aren’t buying into its proposition – perhaps an indication that it is failing to identify with its target market. To avoid falling into the same trap as M&S, Next will need to carefully rethink who its customer is and how to best attract them.”

Readers' comments (1)

  • darren hoggett

    Next are usually one of the better performers out there, so this is indeed a warning to all retailers. The blasé attitude of retailing has to come to an and and immediate measures should include:

    • Price increases across the board
    • Curtailment of discounting
    • Appropriate stock management
    • Realignment of seasons

    Post crash, retailers had a golden opportunity to be leaner and fitter, but many acted as though we were in a boom. Hence and glut of oversupply, mismanagement and discounting.

    2017 will be tough for many, but there is always money out there and profit to be made, but the increased desperation tactics are being seized upon by the consumer and giving the retailers self inflicted wounds.

    Darren James Hoggett
    J&B Menswear/Norwich

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