Next warns of toughest year since recession

High street giant Next sent out a warning shot from the retail sector as it cautioned over profits for the year ahead and said 2016 could be the 'toughest' since the financial crisis.

Thursday, 24th March 2016, 9:15 am
Updated Thursday, 24th March 2016, 9:22 am
Next Chief Executive Lord Wolfson

The group - seen as a retail bellwether - posted a 5% rise in underlying pre-tax profits to £821.3 million for the year to the end of January, having already warned over results in January after a difficult Christmas due to unusually warm weather.

Next said it was bracing itself for a slowdown in the global economy and for profits to fall by up to 4.5% in a year that “may well be the toughest we have faced since 2008”.

Next said that, as well as the wider economic woes, it also fears consumers are shifting spending away from clothing towards other areas, such as eating out and travel.

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It is forecasting profits for the year to the end of January 2017 of between £784 million and £858 million - ranging from a fall of 4.5% to growth of 4.5%.

The group’s predictions for full-price Next brand sales - a key measure of the company’s performance - range from a fall of 1% to growth of 4%.

Next said it was preparing for a worst-case scenario, which could be skewed by weather conditions, but said “at this stage we think it is best to prepare ourselves for what could be a difficult year”.

Lord Wolfson, chief executive of Next, said: “It looks as though we may be set for a challenging year, with economic and cyclical factors potentially working against us.”

The group’s gloomy comments will spark concerns for UK growth, which has been propped up by consumer spending and a thriving services sector in recent years.

Its warning also comes despite what the group described as a “solid” year, with Next Brand sales up by 3.7%.

Sales across its 540 stores rose 1.1% as growth was held back by a disappointing Christmas performance, when sales dropped 0.5%.

It posted growth of 7.7% across its Next Directory online and catalogue arm, but this marked a sharp slowdown on the 12.1% surge seen the previous year as the festive trading woes were compounded by stock shortages and tougher online competition.

Shares in the group tumbled to the their lowest level for more than two years - down as much as 10%, marking the first time shares have traded below £60 since January 2014.

Other listed retailers were also sent lower, with blue chip rival Marks & Spencer off 3% and Debenhams 2% lower in the FTSE 250 Index.

Next also said profit margins over the year ahead would be lower as it faces rising staff costs and is predicting same-store sales to fall.

Lord Wolfson said while trading in January had been “good”, the volatility of its sales performance since the beginning of the year has added to fears of a consumer slowdown.

“There’s going to be a consumer slowdown this year, but we’re not going as far as predicting a recession,” he said.

The group set out a plan to help it weather a pull-back in spending, including revamping its Directory arm and delivery service, keeping a tight rein on costs and improving its buying process.

Lord Wolfson said: “It may well feel like walking up the down escalator, with a great deal of effort required to stand still.

“It will not be the first time we have felt this way, and our experience is that the effort put into improving the business in tough times can pay handsome rewards when conditions improve.”

The group plans to introduce two-hour delivery slots towards the end of the financial year, down from the four or five hour windows currently offered to customers.