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LONDON (Alliance News) - Next PLC on Wednesday lowered its guidance for full-year profit and sales after reporting a fall in full-price sales in the fourth quarter of its financial year so far.
Shares in Next were trading down 9.5% at 4,319.00 pence on Wednesday morning, the worst performer in the FTSE 100. The weak 2017 outlook and soft sales it reported also dragged on rivals, with Primark-owner Associated British Foods PLC and Marks & Spencer Group PLC also among the worst blue-chip performers.
The clothing and homeware retailer said full-price sales fell by 0.4% in the 54 days ended December 24, which was an improvement on the third quarter where full-price sales were down 3.5%, but not as good as the growth it had expected to achieve against poor comparative numbers a year earlier.
This came as a 3.5% decline in the struggling Next Retail business was not offset by 5.1% growth in its stronger Next Directory business. Next Retail comprises the high street stores and Next Directory comprises the online and catalogue business.
In the year to the same date, full-price sales declined by 1.1%, with a 4.3% fall in Next Retail and 3.6% growth in Next Directory.
Total sales including markdowns, however, rose by 0.4% in the year, although Next has been trying to rely less on sales it makes from reduced items and increase the sales it generates from full-priced garments.
Next noted that "despite a difficult season", stock for its end-of-season sale was "well-controlled", meaning it wasn't left with huge amounts of unsold stock at the end of the season. The amount of stock carried into the end-of-season sale was down 3.0% year-on-year, but sales from the end-of-season sale were down 7.0%.
As a result of its poorer-than-expected sales performance, Next lowered its central guidance for total full-price sales in the year to the end of January, meaning it has now revised its guidance for the fifth time this financial year.
In November, Next narrowed its sales guidance to between a fall of 1.75% and growth of 1.25%, from its previous guidance in August of between a fall of 2.5% and growth of 2.5%. This gave it a mid-point estimate of a 0.25% fall, worse than its prior estimate of flat growth. However, on Wednesday, the retailer lowered its central guidance to a fall of 1.0%.
It also lowered its central guidance for full-year underlying pretax profit to GBP792 million, which it said may increase or decrease by GBP7 million depending on trade in January. Next's previous guidance in November was for an underlying pretax profit of between GBP785 million and GBP825 million, which represented a central guided figure of GBP805 million.
Underlying pretax profit in the prior year was GBP821.3 million, while reported pretax profit was GBP836.1 million.
Next said that it expects the "cyclical slowdown" in spending on clothing and footwear to continue into the next financial year, worsened by a further squeeze on general spending as inflation begins to erode real earnings growth.
As a result of the devaluation of sterling following the UK's decision to leave the European Union, Next expects to raise the prices of its like-for-like garments by no more than 5%, which it said will depress sales by around 0.5%.
This means Next expects full-price constant currency sales in the next financial year to be between a 4.5% decline and 1.5% growth, with a mid-point of a 1.5% decrease.
Overseas sales will be boosted by the weak pound, however, which will help full-price reported sales to be around 1.0% better than the constant currency estimate. This leads to a range of between a 3.5% fall and 2.5% growth.
Pretax profit, meanwhile, is expected to be between GBP680 million and GBP780 million, as Next faces "a number of inflationary pressures" to its cost base.
These include GBP13 million from the increase in the UK's National Living Wage, business rates, the apprenticeship levy and energy taxes. General inflation in wages and other non-product costs will increase by GBP6 million, while Next also plans to spend GBP10 million on improving its website systems and online marketing.
"The year ahead looks set to be another challenging year; therefore we are preparing the company for tougher times and have set our full-price sales budget accordingly," Next said in a statement.
Next added that it will return surplus cash to shareholders by way of four quarterly special dividends of 45 pence each, with the first to be paid at the beginning of May subject to the outlook remaining in line with its forecasts and no significant changes to market conditions.
It said it has decided to do this in light of "the exceptional levels of uncertainty in the clothing sector and with little visibility of the approach the UK government will be taking to Brexit".
"We believe that in these circumstances it makes sense to give some additional certainty to shareholders over cash distributions," Next said.
By Karolina Kaminska; karolinakaminska@alliancenews.com; @KarolinaAllNews
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